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Why Tax Effort Falls Short of Tax Capacity in Indian States


  • Sandhya Garg
  • Ashima Goyal
  • Rupayan Pal


This article attempts to measure tax capacity and tax effort of fourteen major Indian states from 1991–1992 to 2010–2011 using stochastic frontier analysis. It shows that the variation across states in tax effort is wide and increasing over time. While per capita gross state domestic product, literacy rate, and labor force participation have positive association with tax capacity, a greater share of agriculture has negative association. Furthermore, intergovernmental transfers, given tax capacity, have negative association with tax effort of states. Expenditure on debt repayment is also adversely associated with tax effort but to a lower extent than outstanding liabilities. Enactment of Fiscal Responsibility and Budget Management Act is associated with improvement in states’ tax effort. Both within-state political competition and governance indicators have positive association on tax effort.

Suggested Citation

  • Sandhya Garg & Ashima Goyal & Rupayan Pal, 2017. "Why Tax Effort Falls Short of Tax Capacity in Indian States," Public Finance Review, , vol. 45(2), pages 232-259, March.
  • Handle: RePEc:sae:pubfin:v:45:y:2017:i:2:p:232-259

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    Cited by:

    1. Zárate Marco, Anabel & Vallés Giménez, Jaime, 2019. "Regional tax effort in Spain," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 13, pages 1-32.
    2. Junxue Jia & Siying Ding & Yongzheng Liu, 2018. "Decentralization, Incentives, and Tax Enforcement," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1819, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    3. repec:cuf:journl:y:2017:v:18:i:1:valles-gimenez is not listed on IDEAS


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