TAX BUOYANCY AND TAX DEVALUATION
What is the issue? Poor responsiveness of tax collection to economic growth poses new challenges for norms on sharing taxes with the states. In this regard, here is a look at tax buoyancy trend and its impact on tax devolution. What is tax buoyancy? Tax buoyancy is one of the key indicators to assess the efficiency of a government’s tax system. Generally, as the economy achieves faster growth, the tax revenue of the government also goes up. Tax buoyancy explains this relationship between the changes in government’s tax revenue growth and the changes in GDP. In other words, it measures the responsiveness of tax mobilisation to economic growth. What are the determining factors? Tax buoyancy depends largely on - the size of the tax base the friendliness of the tax administration the reasonableness and simplicity of the tax rates Look at just one year’s tax buoyancy to arrive at any conclusion on the tax system’s efficiency would be unfair. There are many other