The Measurement of Tax Elasticity in Sri Lanka: A Time Series Approach

Abstract

Revenue mobilisation is an important goal of tax reform. In this regard, tax elasticity-the built-in responsiveness of revenues to changes in income-constitutes an essential ingredient for tax policy formulation. This paper utilises a time series approach to empirically estimate tax elasticities for Sri Lanka for the period 1960-1994. Tax elasticities are computed for income, turnover, excise, import and total taxes on a short run and long run basis for the pre-reform as well as the post-reform periods. All elasticity coefficients reveal a low responsiveness of taxes to income growth with estimates registering less than unity in most cases. The tax buoyancies computed for the same taxes show that tax revenues have been maintained through discretionary measures. (JEL H21, H22)