Buoyancy And Elasticity: Determinants Of
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BUOYANCY AND ELASTICITY: DETERMINANTS OF
LOCAL TAX SYSTEMS PERFORMANCE
By: Julhusin B. Jalisan
Civil servants and priests, soldiers and ballet-dancers, schoolmasters and police constables, Greek museums and Gothic steeples, civil list and services list–the common seed within which all these fabulous beings slumber in embryo is taxation.
Karl Marx
Every citizen, whether young or old, wealthy or poor, property owners or property-less, pays taxes to help finance governmental functions. Every business pays taxes, which almost certainly enter into the prices the consumers pay. The wages of the workers are withheld for income taxes. No one can avoid paying taxes.
Taxes have always been the traditional sources of government revenues. Recourse to taxation to finance the operational costs of government has been availed of by rulers of all times and climes from antiquity down to the present. It is what the government uses for community development.
Taken in this light, therefore, taxes are not mere contributions of the people to their governments, but represent the peoples investments for their own welfare and future. Despite this, however, and the compulsory nature of taxes, many delinquent taxpayers manage to evade or avoid the payment of their taxes in one way or another. Tax evasion has become a serious societal problem. Too many people fail to pay their rightful tax. As a consequence, the government incurs huge deficit, and its delivery of basic services is tremendously affected.
With R.A. 7160, otherwise known as the Local Government Code of 1991, providing greater degree of fiscal autonomy to local government units, a periodic evaluation of the performance of the prevailing local tax system from the perspective of resource mobilization is, therefore, an imperative task among local government units.
Estimation of Tax Buoyancy and Elasticity
An important point to consider in any tax system is the responsiveness of the tax revenue to changes in income. According to Mansfield (Majuca, 1998), this responsiveness is measured by the concepts of tax elasticity and tax buoyancy.
Tax buoyancy is a ratio of the percentage change in tax revenue to the percentage change in aggregate income with the revenue changes inclusive of the increment in revenue brought about by discretionary factors. Modifications in the statutory rates and bases and extraordinary changes in the degree of administrative efficiency constitute discretionary tax measures. The growth in tax revenues (after adjustments are made for discretionary changes) reflects the growth attributable to changes in economic base and to trend changes in administrative efficiency. Thus, tax elasticity, which is based on revenue changes after adjusting for discretionary effect, is a measure of the responsiveness of tax revenues to automatic changes in economic activity and tax administration. Tax elasticity is the product of two components: (1) the base elasticity which is the elasticity of the base with respect to aggregate income; and (2) the rate elasticity which is the elasticity of the tax yield with respect to the base. The change in tax revenues during a given period is the sum total of changes in economic activity and changes due to discretionary tax measures (Trinidad, 1981).
Estimation of Tax Buoyancy. The Tax buoyancy is estimated econometrically by regressing actual or unadjusted tax receipts on aggregate income, in either of the following equations:
(1) Tt = ao + bo Yt
(2) log Tt = αo + βo log Yt
where:
is the actual revenue inclusive of the revenue impact of discretionary tax measures at time t.
Yt
is aggregate income at time t.
is the marginal tax rate and serves as the coefficient of aggregate income when the linear specification is used. It is the derivative of tax revenue with respect to aggregate income, dT/dY, i.e. it is the change in tax yield per unit change in income.
The tax buoyancy, n, may be derived from b by the following adjustment:
(3) n = bo (Yj/Tj).
When calculated from the coefficient of a linear regression equation, tax buoyancy is variable and its value depends on the values of Y and T used in equation (3). Usually, tax buoyancy is evaluated at the means, i.e. mean values of Y and T in the estimation period, i.e., Yn and Tn are plugged in equation (3).
The coefficient βo of the double logarithmic specification, equation (2), is by itself an estimate of tax buoyancy. Implicit in the use of (2) is the assumption that tax buoyancy is constant or invariable in the estimation period.
Estimation of Tax Elasticity. To estimate the built-in elasticity of a tax with respect to aggregate income, the actual tax yield series will be adjusted for discretionary effects. The various methodologies of cleaning the historical tax revenue series of discretionary effects are well expounded by Manasan (1981).
Cleaning the Tax Series of Discretionary Effects.
There are three major approaches to adjusting historical tax receipts series for the revenue impact of discretionary tax measures, namely: (1) Constant rate method, (2) Proportional adjustment method, and (3) Dummy variable technique. The constant rate structure method requires the calculation of the effective tax rate per income bracket (or commodity grouping) for the chosen reference year. These rates are then applied to the distribution of taxable income (values) across income brackets (commodity groupings) in all other years to generate the “cleaned” tax series, i.e. a tax receipt series that has the same rate structure as the reference year. The feasibility of using the constant rate structure method depends on the availability of data on effective tax rates per income bracket (commodity grouping) for the reference year and the distribution of taxable income (values) by income (commodity) groupings for each year of the estimation period. While the former is readily accessible, the latter is not, especially if one is concerned with building a series long enough for econometric work.
Unlike the constant rate structure method,