About Tax Buoyancy:
- Tax buoyancy explains the relationship between the changes in the government’s tax revenue growth and the changes in Gross domestic product (GDP).
- There is a strong connection between the government’s tax revenue earnings and economic growth.
- As the economy achieves faster growth, the tax revenue of the government also goes up. Tax buoyancy explains this relationship.
- It refers to the responsiveness of tax revenue growth to changes in GDP.
- When a tax is buoyant, its revenue increases without increasing the tax rate.
- It depends upon:
- the size of the tax base;
- the friendliness of the tax administration;
- the rationality and simplicity of tax rates;
- Tax buoyancy will be highest for direct taxes. Generally, direct taxes are more sensitive to the GDP growth rate.
What is tax elasticity?
- A similar-looking concept is tax elasticity. It refers to changes in tax revenue in response to changes in the tax rate.
- For example, how tax revenue changes if the government reduces corporate income tax from 30 per cent to 25 per cent indicates tax elasticity.
What is the Laffer Curve?
- It is an economic theory pioneered by economist Arthur Laffer.
- Created in 1974, it visually shows the relationship between tax rates and the amount of tax revenue collected by governments.
- It suggests that tax rates above a certain threshold reduce tax revenue since they incentivise people not to work.
- It suggests there is an optimum tax rate which maximises total tax revenue.
