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Why tax effort falls short of capacity in Indian states: A Stochastic frontier approach

Author

Listed:
  • Garg, Sandya

    () (Indira Gandhi Institute of Development Research)

  • Ashima Goyal

    () (Indira Gandhi Institute of Development ResearchInstitute of Economic Growth)

  • Rupayan Pal

    () (Indira Gandhi Institute of Development Research)

Abstract

Taxation is an important tool to enhance the economic development and to finance the expenditure responsibilities of a government. This paper attempts to measure the tax capacity and tax effort of 14 major Indian states from 1992-92 to 2010-11 using Stochastic Frontier Analysis. The use of tax capacity frontier helps to identify those states which are operating near their tax capacity and states which are away from tax frontier. The results indicate presence of large variation in tax effort index across states and which seems to be increasing over time. Econometric analysis suggests that economic and structural variables have significant impact on the tax capacity. While per-capita gross state domestic product has positive effect on states' own tax revenue, relative size of agriculture sector of a state has adverse effect on its own tax revenue. The evidence on tax efficiency suggests that the higher inter-governmental transfers tend to reduce tax efficiency. Outstanding liabilities and expenditure on debt repayment also indicate adverse effect on tax efficiency, but the adverse effect of the latter is lesser than the former. Enactment of Fiscal Responsibility and Budget Management Act seems to have improved the tax efficiency which has been further strengthened by the better law and order inside states. Higher political competition inside a state, represented by effective number of parties, has favourable effect on the tax efficiency of a state. Implications are drawn for policy.

Suggested Citation

  • 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.
  • Handle: RePEc:ind:igiwpp:2014-032
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    References listed on IDEAS

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    2. repec:cuf:journl:y:2017:v:18:i:1:valles-gimenez is not listed on IDEAS
    3. repec:cuf:journl:y:2017:v:18:i:2:valles-gimenez is not listed on IDEAS
    4. Sandhya Garg, 2015. "Spatial convergence in public expenditure across Indian states: Implication of federal transfers," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2015-028, Indira Gandhi Institute of Development Research, Mumbai, India.
    5. T.M. Thomas Issac & R. Mohan, 2016. "Sustainable Consolidation: Suggesting the Way Ahead for Kerala," Working Papers id:10789, eSocialSciences.
    6. Abhishek Anand & Lekha S. Chakraborty, 2016. "'Engendering' Intergovernmental Transfers: Is There a Case for Gender-sensitive Horizontal Fiscal Equalization?," Economics Working Paper Archive wp_874, Levy Economics Institute.

    More about this item

    Keywords

    tax capacity; tax effort; stochastic frontier analysis; fiscal federalism;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H29 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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