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The Random Coefficient Approach for Estimating Tax Revenue Stability and Growth

Author

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  • Yasuji Otsuka

    (Nevada Public Utilities Commission)

  • Bradley M. Braun

    (University of Central Florida)

Abstract

The issue of tax revenue stability and growth has been of concern to policy makers and economists for many years. One important focus of the literature is the optimal tax portfolio, which assumes that revenue variance is entirely unpredictable. However, as evidenced by Fox and Campbell, some revenue variance arising from changes in economic conditions is predictable. The purpose of this study is to revisit Fox and Campbell's work. They studied revenue growth and stability with a fixed coefficient model (FCM). This study uses a random coefficient model (RCM). The RC Mapproach appears to provide improved estimates and confirms the conclusions of their earlier work. The response of short-run elasticities to the business cycle appears both strong and variable across commodities, and no single commodity dominates revenue growth or stability. Although this study supports the design of an optimal tax portfolio, it emphasizes the need to explicitly model for economic conditions and to continually adjust the tax portfolio. However, given the political and budgetary process, these adjustments may not be feasible.

Suggested Citation

  • Yasuji Otsuka & Bradley M. Braun, 1999. "The Random Coefficient Approach for Estimating Tax Revenue Stability and Growth," Public Finance Review, , vol. 27(6), pages 665-676, November.
    • Handle: RePEc:sae:pubfin:v:27:y:1999:i:6:p:665-676
    DOI: 10.1177/109114219902700606
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    References listed on IDEAS

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    1. Harmon, Oskar Ragnar & Mallick, Rajiv, 1994. "The Optimal State Tax Portfolio Model: An Extension," National Tax Journal, National Tax Association;National Tax Journal, vol. 47(2), pages 395-401, June.
    2. Swamy, P A V B & Tavlas, George S, 1995. "Random Coefficient Models: Theory and Applications," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 165-196, June.
    3. Bradley M. Braun & L. E. Johnson & Robert D. Ley, 1993. "State Revenue Shortfalls," American Journal of Economics and Sociology, Wiley Blackwell, vol. 52(4), pages 385-397, October.
    4. Harmon, Oskar Ragnar & Mallick, Rajiv, 1994. "The Optimal State Tax Portfolio Model: An Extension," National Tax Journal, National Tax Association, vol. 47(2), pages 395-401, June.
    5. Gentry, William M. & Ladd, Helen F., 1994. "State Tax Structure and Multiple Policy Objectives," National Tax Journal, National Tax Association;National Tax Journal, vol. 47(4), pages 747-772, December.
    6. Gentry, William M. & Ladd, Helen F., 1994. "State Tax Structure and Multiple Policy Objectives," National Tax Journal, National Tax Association, vol. 47(4), pages 747-72, December.
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    Cited by:

    1. Joshua C. Hall & Antonios M. Koumpias, 2018. "Growth And Variability Of School District Income Tax Revenues: Is Tax Base Diversification A Good Idea For School Financing?," Contemporary Economic Policy, Western Economic Association International, vol. 36(4), pages 678-691, October.
    2. Joshua Hall & Antonis Koumpias, 2015. "The Volatility of School District Income Tax Revenues: Is Tax Base Diversification a Good Idea?," Working Papers 15-14, Department of Economics, West Virginia University.

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