Measuring Tax Potential-A Note on Ninth Finance Commissions Approach

A Note on Ninth Finance Commission's Approach N Krishnaji The Ninth Finance Commission claims to have adopted a normative approach in assessing the tax revenue capacities of the different states and for this purpose the commission has, in its first report covering 1989-90, employed a regression equation fitted to past data to generate estimates of tax potential. This note discusses the regression equation and the manner in which it has been used for making revenue projections and shows that the whole procedure is shot through with defects.