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Author(s): Ankie Scott-Joseph, Tracy Maynard, Nichelle Yearwood, and Jamila Beckles
Tax systems exist primarily to raise revenue to fund government operations and facilitate economic growth. Unless tax revenues grow sufficiently, governments must reduce expenditures, raise tax rates, or alter other structural characteristics. This paper investigates the impact of tax changes on economic activity in Barbados, as well as addresses the question: does an elastic tax structure provoke greater public spending? We focus our analysis on the derivation of coefficients for short-run buoyancy, long-run buoyancy and the speed of adjustment per tax category. Estimates are derived empirically by applying Error Correction Models (ECM). For the study period 1980-2014, the results indicate that in the short-run all categories of taxes have coefficients that are below unity – taxes are not buoyant. Conversely, in the long-run Income Tax, Excise Duties, Value-Added Tax (VAT) and Company Tax, are buoyant. The speed of adjustment is highest for Excise Duties (41 per cent) i.e., adjustment towards its long-term buoyancy is fast. Our study also finds evidence of the “Please Effect” that is, extra collection of tax revenue can trigger an increase in government consumption expenditure.