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Taxable Capacity, Tax Efforts and Structural Break: Do the Child States Follow Their Respective Parents?

Author

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  • Nagendra Kumar Maurya
  • Sapana Singh
  • Shagun Khare

Abstract

The present article makes an attempt to test the hypothesis whether smaller states have better fiscal efficiency in terms of own tax revenue collections or not. This has been tested by taking the case of three states Uttar Pradesh, Madhya Pradesh and Bihar with their child states Uttarakhand, Chhattisgarh and Jharkhand, respectively. For this purpose tax buoyancy, tax capacity and efforts, and structural break models—Chow test (with known break points) and Quandt likelihood ratio (QLR) test (with unknown break points), to see the impact of value added tax (VAT) on own tax revenue (OTR)—have been estimated. Log-log regression model was adopted for both calculating tax buoyancies and taxable capacity of each parent and child state. However, we did not find any conclusive evidence that child states have better tax buoyancy or tax efforts. On the basis of our observations, we concluded that the size of the state is not a major determinant affecting revenue efficiency of the state. Other supplementary policies like efficient tax administration, developed industrial sector, reduced exemptions and concessions, broad-based and effective tax rates are equally important. JEL Classification: H11, H21, H71, R50

Suggested Citation

  • Nagendra Kumar Maurya & Sapana Singh & Shagun Khare, 2016. "Taxable Capacity, Tax Efforts and Structural Break: Do the Child States Follow Their Respective Parents?," South Asian Journal of Macroeconomics and Public Finance, , vol. 5(2), pages 186-219, December.
    • Handle: RePEc:sae:smppub:v:5:y:2016:i:2:p:186-219
    DOI: 10.1177/2277978716671053
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    References listed on IDEAS

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    1. Le, Tuan Minh & Moreno-Dodson, Blanca & Bayraktar, Nihal, 2012. "Tax capacity and tax effort : extended cross-country analysis from 1994 to 2009," Policy Research Working Paper Series 6252, The World Bank.
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    7. Neelam Timsina, 2007. "Tax Elasticity and Buoyancy in Nepal: A Revisit," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 19, pages 9-21, April.
    8. Garg, Sandya & Ashima Goyal & Rupayan Pal, 2014. "Why tax effort falls short of capacity in Indian states: A Stochastic frontier approach," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2014-032, Indira Gandhi Institute of Development Research, Mumbai, India.
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    1. Avipsa Mohanty & Dinabandhu Sethi & Asit Ranjan Mohanty, 2022. "Does petroleum tax revenue drive sales tax effort of Indian states? A stochastic frontier approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1257-1268, January.
    2. Avipsa Mohanty & Dinabandhu Sethi & Asit Ranjan Mohanty, 2020. "Central Transfer a Curse or Blessing? Evidence from the Relative Revenue Effort of Indian States," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(2), pages 214-227, June.

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    More about this item

    Keywords

    Fiscal efficiency; OTR; tax efforts; small states; structural break;
    All these keywords.

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • R50 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - General

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