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Tax Base Elasticities: A Multi‐State Analysis of Long‐Run and Short‐Run Dynamics

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  • Donald Bruce
  • William F. Fox
  • M. H. Tuttle

Abstract

We examine the relative dynamic responses of state personal tax revenues and sales tax bases to changes in state personal income. Our econometric analysis, which includes separate analyses of long‐run and short‐run dynamics for each state, permits the estimation of asymmetric short‐run responses depending upon the relationship between current and expected tax base growth. Results indicate that the average long‐run elasticity for income taxes is more than double that for sales taxes. Most states have asymmetric short‐run income elasticities, which are again greater for income taxes than for sales taxes. However, a joint analysis of long‐ and short‐run dynamics reveals that neither tax is universally more volatile. After calculating state‐specific income elasticities for both taxes, we employ cross‐section regression techniques to explain the variation in elasticities across states. Several policy factors are found to be important, including elements of tax bases and rate structures.

Suggested Citation

  • Donald Bruce & William F. Fox & M. H. Tuttle, 2006. "Tax Base Elasticities: A Multi‐State Analysis of Long‐Run and Short‐Run Dynamics," Southern Economic Journal, John Wiley & Sons, vol. 73(2), pages 315-341, October.
    • Handle: RePEc:wly:soecon:v:73:y:2006:i:2:p:315-341
    DOI: 10.1002/j.2325-8012.2006.tb00774.x
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    3. Nepal Rastra Bank, 2017. "Elasticity and Buoyancy of Taxation in Nepal: A Revisit of the Empirical Evidence," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 29(1), pages 19-32, April.
    4. OGNERU, Victor, 2019. "Analysis Of The Relationship Between Tax Revenue And Gross Value Added In The Romanian Economy," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 23(2), pages 37-55, June.
    5. Charalambos Pattichis, 2022. "Are tax revenue elasticities consistent with a balanced government budget? An analysis and implications for six CEE countries," Economics and Business Letters, Oviedo University Press, vol. 11(1), pages 33-40.
    6. Sunjoo Kwak & Jongmin Shon, 2022. "Tax Salience and Cyclical Asymmetry in Tax Rate Adjustments: Testing the Indirect Tax Hypothesis," Hacienda Pública Española / Review of Public Economics, IEF, vol. 240(1), pages 3-29, March.
    7. Soyoung Park & Sungchan Kim, 2022. "The Effects of Fiscal Rules Based on Revenue Structure: Evidence from U.S State Governments," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 39(3), pages 763-781, October.

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