Buoyancy and Elasticity of Tax: Evidence from Ghana

Abstract

In public finance, two important measures that have been used to assess the efficiency of any tax system in terms of its mobilization capacity are tax buoyancy - total response of tax revenue to changes in national income and discretionary changes in tax policy over time; and tax elasticity - automatic response of tax revenue to GDP changes less the discretionary tax changes. In this study, we used the Dummy Variable Technique to control for effects of the Discretionary Tax Measures on Historical Time Series Data for the period 1970-2007 to estimate the elasticity of the Ghanaian tax system.Our findings revealed that the overall tax system in Ghana was buoyant and elastic in the long run and buoyancy exceeded the elasticity, but in the short run the reverse was the case. We also observed an improvement in both buoyancy and elasticity over the reform period (1985-2007) as evidenced in pre-reform buoyancy and elasticity coefficient which were generally less than unity but became greater than one after the reform. Decomposition of the buoyancy coefficients into tax-to-base and base-to-income elasticities showed that the former was greater than the latter by their indices indicating that there is potential revenue in the economy which is untaxed. Overall tax elasticity was estimates to be about 1.03, suggesting that the responsiveness of the tax system to a unit change in GDP was more that unity thereby rejecting the hypothesis that the overall tax system is income inelastic in the long run. General and specific recommendations aimed at improving tax collection are made.