FISCAL PERFORMANCE AND ECONOMIC GROWTH: THE BUOYANCY OF THE TAX STRUCTURE IN LIBERIA (DEVELOPMENT, PLANNING)

In most less developed countries (LDCs), the public sector's role in planning development programs has been considerable over the past two decades, but the financing aspects of most plans have not been given much emphasis especially with respect to the mobilization of domestic financial resources.;Tax buoyancy measures the ability of the tax system to generate proportionately higher revenues through discretionary actions and revenue growth that is automatically generated through the process of economic growth. In essence, tax buoyancy measures the responsiveness of the tax system to economic growth.;The study employs ordinary least square logarithmic regression technique with time series data to estimate the tax revenue performance.;The findings of the study reveal that every major tax category, including total tax revenue, had a buoyancy of more than 1 except iron ore profit sharing. Total tax revenue had a buoyancy of 1.25 which means that with every 1 percent increase in GDP, the tax system responded by an increase of 1.25 percent in total tax yield.;Due to the limitation of other domestic sources of development finance and the escalating external debt crisis in LDCs, taxation is generally believed to be the primary fiscal tool to mobilize domestic financial resources. This study assesses the Liberian tax system using tax buoyancy as the tax performance criterion for the period 1970-1983.;This level of tax buoyancy implies that the overall share of tax revenue in GDP has been growing, thus facilitating the transfer of resources to government. However, with respect to total government expenditure, the tax system was found to be inadequate as the elasticity of total government expenditure was greater than the buoyancy of the tax system, reflecting an expenditure-revenue gap.;The conclusion drawn from the study is that if the expenditure-tax revenue trend continues, the government will be faced with a tax system that will finance a decreasing percentage of total government expenditure as the government becomes increasingly involved in planning and implementing development programs. The study then suggests a combination of general fiscal actions to reduce expenditure and increase tax revenue yield as preliminary thoughts for fiscal policy directions. (Abstract shortened with permission of author.).