The Elasticity And Buoyancy Of The Botswana Tax System And Their Determinants

This study extends the theoretical, methodological and empirical developments in tax elasticity and buoyancy estimation in several ways. First, rather than assuming that the tax base is exogenous, it considers the very strong theoretical possibility that it may be endogenously determined by several factors such as structural shifts in the domestic economy; developments in the external economy; trends in regional cooperation and integration; and tax effort and evasion. Using the Botswana tax system as a case study, it shows that these factors are important determinants of the tax base, and hence, tax elasticity and buoyancy. Utilizing a Vector Error Correction Model (VECM), it reveals that the Botswana tax system is income-elastic and buoyant; trends in regional cooperation and integration are exerting negative influence on tax revenue via its depleting impact on Southern African Customs Union (SACU) revenue; tax evasion is revenue-depleting, and hence, dampens the elasticity and buoyancy of the tax system; openness of the economy has significant influence on tax revenue yield, thus, trade liberalization and globalization have serious implications for tax system elasticity and buoyancy; and economic diversification resulting in dynamic structural shifts have positive effects on both the tax base and revenue yield. It emphasizes that mineral tax revenue is buoyant and elastic with respect to mining GDP; non-mineral income tax is buoyant and elastic with respect to exports; customs and excise duties are neither buoyant nor elastic with respect to imports and regional integration; and also that government tax effort is only about 27%, a degree far below its potential. These findings carry important policy implications.