Revenue Productivity of the Tax System in Tanzania, 1979-1989

This paper measures the income elasticity of the Tanzanian tax system by decomposing elasticity of tax into base-to-income and tax[1]to-base elasticities. Such a decomposition of elasticity is important since while the latter is virtually within the control of the authorities, the former lies outside their control. The estimation results demonstrate an income inelastic tax system (elasticity less than unity). This implies that if GDP grows by 1 per cent, tax revenues will grow by less than 1 per cent. Analysis of the components of the overall tax elasticities brings out the generally low value of the tax-to-base relative to base-to-income elasticities as a key factor in explaining the fairly low elasticity of the tax system. These results have important implications for tax reform. An elastic tax structure is appropriate in a developing economy since it implies that tax collections will grow automatically with the growing economy without resorting to frequent, potentially sensitive discretionary charges in tax structure.