Doctoral Dissertations

Date of Award

6-1984

Degree Type

Dissertation

Degree Name

Doctor of Philosophy

Major

Economics

Major Professor

Robert A. Bohm

Committee Members

Boehm, Carroll, Garrison

Abstract

This study traces the development of the concept of state tax revenue adequacy as a major criterion in the evaluation of a state tax system. It is seen that the concept of adequacy has become synonymous with responsive tax structures. This responsiveness implies that an adequate tax structure should not have to be modified continually through rate and base changes in order to meet the demands for public expenditures. A key indicator of adequacy is the degree of elasticity with respect to per capita income.

Following the tradition in the literature, the major research vehicle is the revenue model. A nine sector model is developed and estimated using the seemingly unrelated regressions technique. On the basis of the results obtained from this model, it is determined that the present Tennessee tax system responds adequately to changes in population but inadequately to changes in per capita income.

Due to the demonstrated inability of the present tax structure to provide revenues corresponding to the growth in demand for public expenditures, an income tax is proposed. As a means of evaluating the potential impact on the adequacy of the Tennessee tax system of such an action, a simulation is performed. The results of this simulation indicate that the recurring problem of poor responsiveness of tax revenues to economic growth can be overcome through the introduction of a flat rate income tax, based either on federal taxable income or the federal tax obligation. A tax system which includes both the current sales tax and the proposed income tax would be responsive to both income and population growth, which are the major indicators of growth in the demand for public expenditures. Revenues produced by relatively low rates would be comparable to those generated now by a sales tax with a very high rate.

The proposed two base system will place Tennessee in a much better position to weather the fiscal stresses of the eighties. Additionally, a revision of tax system emphasis incorporating income and sales taxes provides spillover benefits in the areas of equity, efficiency and administration.

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