Estimating Tax Buoyancy using Co-integration Technique

An important question related to a tax system is that how fast the tax revenues respond to economic growth. Would the percentage change in tax revenue be more or less than the GDP growth rate? This information has value to the policy makers in order to judge the appropriateness of a tax system and induce changes if necessary. The index which normally provide such an information is the tax buoyancy. This article attempts to estimate tax buoyancy using co-integration technique, and Auto-regressive Distributed Lag (ARDL) method for the period 1359-1393. The results based on the long run equilibrium relations indicate that total tax buoyancy as well as direct and indirect tax buoyancy are more than one. This finding indicate that tax revenues grow faster than the GDP growth rate. Hence the share of tax revenue in the government budget would increases over time and there is no need to adjust the tax system and the tax rates.