February 29, 2016

Tax to GDP Ratio, Redux

Vivek Dehejia, Visiting Fellow at IDFC Institute, writes in response to the recently released Economic Survey on India's tax to gross domestic product ratio (GDP).


He writes "The Economic Survey 2015-16 has a chapter devoted largely to tax to GDP ratio—for the first time so far as I am aware. Arvind Subramanian, chief economic adviser and architect of the survey, deserves enormous credit for turning what to many might have been an arcane technical issue into a live public policy debate. The headline finding in chapter 7 of the survey is that, when controlling for GDP per capita, India is not, in fact, a negative outlier, as Chakravarty and I had claimed. Who is right?...

Start with a simple statistical argument: an outlier is always relative to a given data set. So while, as we ourselves documented, the data clearly show that India’s tax to GDP ratio is low compared not just to the Organisation for Economic Co-operation and Development but also emerging economies—see table 1 in chapter 7—the report then goes on to argue that this vanishes when controlling for the level of per capita GDP, as presented in figure 2. However, the report itself then establishes—see figure 3 and table 2—that when democracy is added as an additional control, India re-emerges as a negative outlier in total tax to GDP ratio, as also total government expenditure and especially health and education expenditure as shares of GDP....

One other claim in the chapter needs to be probed further. In section 7.13, it is asserted: “India’s tax to GDP ratio has increased by about 10 percentage points over the past six decades from about 6% in 1950-51 to 16.6% in 2013-14.” While this is true, it is incomplete and perhaps misleading....The bottom line of the empirical research is that, depending on how you slice and dice the data, you can find that India’s tax to GDP ratio is a negative outlier, as Chakravarty and I argue, or that it is not, as the Economic Survey argues. This invites the question, is there any theoretical basis to assert that tax to GDP ratio should rise with per capita income?"


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Topic : Transitions / In : OP-EDS
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