Tax Elasticity , Laffer Curve, Tax Buoyancy,

 

TAX ELASTICITY: 

• Tax Elasticity refers to changes in tax revenues in response to changes in tax rate. 
• For example, Changes in Tax revenue when the government reduces corporate income tax from 30 per cent to 25 per cent indicate tax elasticity. 

Tax Elasticity in India:

• Post LPG reforms, the Income Tax rates have reduced while the tax collections have increased. 
• Tax elasticity can be understood through Laffer curve.

Laffer Curve: 

• The Laffer curve, explains the theoretical dynamics of Tax Elasticity ie relationship between rates of taxation and the resulting levels of the government's tax revenue. 
• As per the Laffer curve if the tax rate increases, the government revenue also increases up to an optimum level. 
• Post which, if the government tries to increase taxes, the government revenue will start falling.

So Conclusively, Revenue shortfall can be because of:

                           Increased rates of Tax Rates.

                                     providing 

                    More incentive to evade taxes (illegal).

 TAX BU

OYANCY:

• Tax Buoyancy explains relationship between the changes in government’s Tax revenue growth wrt the changes in GDP.
• Tax buoyancy is one of the key indicator to assess the efficiency of a Government’s tax system.
• Tax buoyancy measures the responsiveness of tax mobilization to economic growth.

Tax buoyancy depends largely on –

• Size of the Tax Base
• Friendliness of the Tax Administration
• Simplicity of the tax Rules 

Tax buoyancy in India :

• Tax Buoyancy greater than 1 signifies that tax revenues grow at a faster rate than the growth in national income.
• Direct Tax Buoyancy at 2.52 in F.Y. 2021-22 is the highest Direct Tax Buoyancy recorded over last 15 years and it was on account of low base effect .
• In 2022-23 ,Central Direct Tax Buoyancy = %change in direct taxes / % change in nominal GDP = 17.8% / 15.1% = 1.18