Does Demographic Profile Affect Tax Setting across Regions?: The Indian Case

This paper attempts to provide conclusive evidence of variations in demand behaviour across regions using National Sample Survey Organisation (NSSO) data for India. India is well-suited for such an exercise as it provides a ready segregation of vast geographical area in the form of different states. The importance of household composition is brought out clearly via its influence. On optimal commodity taxes. This is done by recognizing each of the chosen 16 Indian states separately and estimating tax rates for them, while incorporating demographic variables specific to each. The results show considerable variations in not only the estimated tax rates, but also in the demand behavior as revealed by response of tax rates to changes in revenue requirements and changes in a social planner's aversion to inequality. In other words, the estimated tax rates are extremely sensitive to the degree of aversion to inequality and the required revenue; the response of each state to these changing parameters is also non-uniform. Our results reveal that indirect taxes are ineffective in redistributing income in the majority of the states under consideration.