ABSTRACT
One of the most important general hypotheses upon which most economists agree is that emerging nations must increasingly mobilise their own internal resources to promote economic growth, and perhaps the most important instrument by which resources may be marshalled is the implementation of an effective tax policy. N. Kaldor has pointed out that
the importance of public revenue to the underdeveloped countries can hardly be exaggerated if they are to achieve their hopes of accelerated economic progress. Whatever the prevailing ideology or political colour of a particular government, it must steadily expand a whole host of nonrevenue-yielding services—education, health, communication systems, and so on—as a prerequisite to a country's economic and cultural development [ Kaldor, 1964: 255].
As governments throughout the Third World implement mechanisms to capture internal financial resources, it is necessary that there be quantitative measures to evaluate success in stimulating public resources through tax policy. This analysis utilises the revenue-income elasticity methodology to measure the responsiveness of revenue structures to GDP in the nations comprising the Central American Common Market (CACM), and to relate the theory of revenue-income elasticity of two fiscal policy criteria. The first issue in evaluating fiscal self-help performance is the ability of the tax structure to generate proportionately higher revenues both through discretionary action (tax rate and base changes, legislative enactment, improvement in collection techniques, etc.) and through revenue growth that is automatically generated through economic activity. This measure is traditionally identified as the tax buoyancy criterion. The second criterion relates to the responsiveness of revenue yields to movement in economic activity alone, or the revenue-income elasticity measure. Among the Third World regions in which sufficient data are available for a statistically accurate measure of these two criteria are the five nations comprising the CACM, including Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. The five countries provide a statistical sample of 24 years in which to test the buoyancy and elasticity criteria, and to evaluate potential improvement in self-help performance of the five countries through the implementation of tax reform policies during the joint CACM-Alliance for Progress period 1961–74. Appendix I outlines the methodology used to estimate buoyancy and elasticity characteristics.