Long run results reveal that agricultural sector, industry value added and service value added as percentage share of GDP are significantly correlated with responsiveness of tax revenue collection – as expected by priori analysis.
Import and Money supply have an adverse relationship with tax revenue in the short run and their significance at 5 percent level is significant.
Impact of Tax Buoyancy on Economic Growth
Tax buoyancy can be affected by various factors, including the size and efficiency of tax bases; administration effectiveness; fairness and clarity of rates; impact of changes over time, so analyzing long-term trends of buoyancy is also vitally important.
Buoyancy measures the rate of change between tax revenue changes and growth in GDP. This measures their responsiveness to changes in GDP and is useful when designing pro-taxpayer policies. As tax buoyancy rises, so too will revenue earned without having to raise tax rates further.
Statisticians use statistical techniques to measure tax buoyancy. First they gather data representing various elements of the tax base and economic activities over time. Next they conduct regression analysis on this relationship between tax revenue and variables that they study; their elasticity coefficient provides an estimation of tax buoyancy.
An indicator of a healthy taxation system is its ability to maintain a long-term positive trend of tax buoyancy. A higher tax buoyancy reflects its efficiency and can contribute towards fiscal stability, sustainable economic growth and fair treatment of taxpayers. Furthermore, its use as a comparison benchmark enables policymakers to make more accurate revenue forecasts.
Effect of Tax Buoyancy on Economic Growth in Sierra Leone
Sierra Leone’s economy has long relied heavily on mining. Unfortunately, low global commodity prices and the Ebola outbreak of 2014 and 2015 contributed to its decline, leaving its government searching for alternative revenue sources; mineral exports being particularly susceptible. Therefore it is imperative that a stable tax system provide steady streams of revenue.
This study investigates the relationship between tax buoyancy and economic growth in Sierra Leone using data from 1980-2030. Our analysis shows a positive correlation between tax buoyancy and GDP with coefficients statistically significant at 5 percent level – an encouraging sign that government efforts to improve tax collection are being successful.
But, it is also essential to keep in mind that the impact of changes to tax laws, economic structures and compliance levels depends on a number of variables; monitoring their effects on tax buoyancy and GDP can assist policymakers with designing pro-taxpayer policies as well as assessing overall efficiency of the tax collection system and identifying any areas for potential improvement.
Tax Buoyancy and Economic Growth in Sierra Leone
Fiscal sustainability in any nation’s tax system depends upon its ability to expand in tandem with GDP. A country’s long-term tax buoyancy measures how much 1 percent growth will raise domestic taxes (excluding natural resource revenues). A higher buoyancy indicates a more effective tax system in terms of providing resources to support future expansion.
Sierra Leone’s long term tax buoyancy has been diminishing over time. From an estimated level of about 1.3 in 2004-05 to roughly 0.2 during year six of this fiscal cycle despite high GDP growth rates, long term tax buoyancy has steadily diminished over time.
This paper uses a multiple regression model to examine the relationship between tax buoyancy and economic growth in Sierra Leone. The model takes into account several determinants, including percentage share of service value added, import, and private consumption in GDP as dependent variables. ARDL bound testing co-integration analysis results indicate a strong, positive and statistically significant relationship between tax revenue and GDP over the long run. These variables suggest that improving tax system effectiveness would require addressing policy issues associated with these sectors.
