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

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dc.contributor.author Garg, Sandhya
dc.contributor.author Goyal, Ashima
dc.contributor.author Pal, Rupayan
dc.date.accessioned 2015-08-14T10:53:15Z
dc.date.available 2015-08-14T10:53:15Z
dc.date.issued 2014-08
dc.identifier.uri http://hdl.handle.net/2275/331
dc.description.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. en_US
dc.language.iso en en_US
dc.relation.ispartofseries WP;WP-2014-032
dc.subject tax capacity en_US
dc.subject tax effort en_US
dc.subject stochastic frontier analysis en_US
dc.subject fiscal federalism en_US
dc.title Why tax effort falls short of capacity in Indian States: A Stochastic frontier approach en_US
dc.type Working Paper en_US

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