IN CONSIDERING CRITERIA for a tax system in a developing country the response of tax revenue to changes in income has often been singled out as a vital ingredient.1 This response is measured by the concepts of tax elasticity and tax buoyancy, the former measuring in some sense the automatic response of revenue to income changes (i.e., revenue increase, excluding the effects of discretionary changes), and the latter measuring the total response of tax revenue to changes in income. A high tax elasticity is said to be a particularly desirable attribute, as it allows growth in expenditure, preferably related to development, to be financed by rising tax revenue without the need for politically difficult decisions to raise taxes. However, in fact, major sources of government revenue may have a low elasticity, in which case the authorities must seek additional revenue by introducing discretionary changes. Then, growth in tax revenue may come about through a high buoyancy 2—including growth through discretionary changes—as opposed to the natural growth through elasticity. Using Paraguay as an example, this paper analyzes the growth of tax revenues over the 1962-70 period—an era of conscious tax reform—by examining two major questions: (1) what was the elasticity of the system and its components, and how is the size of the elasticity coefficient explained? and (2) what was the buoyancy of the system relative to its elasticity? With respect to individual taxes, where were the major differences between buoyancy and elasticity found? These latter questions point to the effect of discretionary changes.
Tax evasion is universal. It depends on the economic and tax structures, types of income, and social attitudes. The theory of tax evasion has limitations since it rests solely on attitudes toward risk, with full information regarding the tax administration’s behavior. Methodologies for estimating tax evasion include estimating the underground economy and comparing declared taxes with potential tax revenue calculated from national accounts. Measures to address tax evasion include use of withholding, presumptive and minimum taxes, selective auditing, penalties, and cross checks between taxes.
THE USUAL PURPOSE of multiple exchange rates is to cope with over-all balance of payments problems. Sometimes, e.g., when multiple rates are designed to deal with problems of particular exports or the relative holdings of various currencies, they may have a direct effect on these problems. But when they are designed to reduce or to counteract internal inflationary pressure, they may have an indirect effect. If multiple rates are to produce such an anti-inflationary effect, they must yield revenue or exchange profits. Frequently, indeed, the raising of revenue is a specific secondary purpose of a multiple rate practice; but in any case, irrespective of the purpose, the result often is an increase of revenue.
The sensitivity (i.e., elasticity and built-in flexibility) of the U. S. individual income tax to changes in national income is of great interest to researchers and policymakers. However, the direct measurement of this sensitivity—that is, the measurement obtained from time-series observations of the relevant variables—has always been difficult, and even at times impossible, because changes in the legal structure of the tax have been too frequent to provide enough observations that relate to the same legal structure to allow statistically significant coefficients to be determined. This was particularly true in the United States before 1954, when the rates were changed frequently; it has also been true since 1963, when important changes occurred in rates, personal exemptions, deductions, and other features. In contrast, during the period between 1954 and 1963, hardly any significant statutory changes occurred in the tax.
Unlike such disciplines as macroeconomics or tax policy, tax administration lacks a coherent body of literature or set of principles within which well-defined “schools” espouse particular intellectual positions. Instead, tax administration is a loosely defined area that embraces law, public administration, sociology, and psychology as well as economics. Nevertheless, tax administration is closely linked to fiscal policy because its ultimate result is to increase or lower government revenue and the overall fiscal deficit; to place higher or lower tax burdens on particular sectors of the economy; and to favor or penalize particular income classes and different factors of production. In addition, tax administration may play a powerful role in influencing the efficiency of the economy by making intended or unintended distortions of consumer choices and producer decisions.
THE ECONOMIC SYSTEM of the United Arab Republic has been changed in the past 12 years from a predominantly free enterprise system to a largely publicly owned and regulated economy. An impressive rate of growth has been attained; since 1956/57, the gross national product (GNP) is estimated to have grown at an average annual rate of more than 5 per cent and per capita income by more than 2.5 per cent a year.
ECONOMISTS GENERALLY AGREE that gains from capital are a proper source of taxation in developing countries. This view was expressed in the Technical Assistance Conference on Comparative Fiscal Administration in Geneva in 1951 and more recently in the Santiago Conference on Fiscal Policy for Economic Growth in Latin America.1 A capital gains tax is on the appreciation of capital assets and is commonly imposed only when the increase in value is realized through sale or exchange. It should be distinguished from net wealth tax, death duties, and other capital taxes in that these are assessed on the total value of assets.
ECONOMIC DEVELOPMENT is frequently accompanied by the growth of population and its increased concentration in urban areas, which imposes greater demands on the government for the provision of essential services, sometimes at a considerable cost. A real problem arises in financing this cost and equitably apportioning it among the members of the community. Because population growth and higher standards of living inevitably enhance the value of land, many governments have sought ways of allocating this cost among the landowners who benefit directly and indirectly from rising land values.
IN UNDERDEVELOPED COUNTRIES the government sector is usually more important than other sectors, not only in those countries where governments have taken upon themselves the task of increasing productive capacity, but also in those where the private sector is relied upon to ensure economic growth.1 In practically all underdeveloped countries it is now customary to have a development program, and fiscal policy is the kingpin in determining the total level of investment. Within fiscal policy, expenditure policies are important; but if tax receipts are not sufficient, governments cannot invest directly or lend to the private sector without resort to deficit financing.
PROBLEMS OF TAXATION in developing countries have been receiving special and increasing attention in recent years, in the context of world concern for accelerating the pace of their economic growth under conditions of stability. Much of the theoretical and applied work has been related to the tasks of constructing productive and equitable tax systems suited to the peculiar economic and social conditions prevailing in various less developed countries. While the emphasis on the public sector has varied as between developing countries, the universal desire for rapid economic and social development has led most of them to accord an expanding role to government activities. Given the comparatively limited amounts of resources that it is ordinarily possible and prudent to obtain from abroad and from domestic borrowing and nontax revenues, most of the developing countries have felt the need to increase tax revenues. The willingness and ability of governments to respond to this need has been an important determinant of their capacity to carry forward development while maintaining economic stability. In working out either a development plan or a stabilization program, a major question that nearly always arises is how much tax revenue the country can reasonably expect to raise and from what sources this should come. In connection with stabilization programs, the answer to this question has an important bearing on the role to be played by other elements of financial policy and, often, on the likely success of the overall program.