Tax Determinant Studies and Socio-Political Variables : A Suggested Methodology

The "displacement effect" hypothesis may be one of the relevant aspects to consider while dealing with the tax revenues or public expenditure over a long period of time. This will give proper weightage to the 'Shift' and 'Changes in elasticity' if any, in the revenue and/or expenditure functions.

In this paper, therefore, an attempt has been made to examine whether (or not) the inclusion of the "displacement effect" hypothesis in the determinant studies would provide better explanation to the growth of tax revenue (or expenditure) and would suggest a better alternative forecasting model. Data used in the study pertain to Union Tax Revenue in India for a period of thirty years. Our findings suggest that revenue expenditure functions give a "better fit" when socio-political variables of global and non-global nature are taken into account.