A Theory of Tax Level Determinants for Developing Countries

Abstract

Hinrichs ' has shown that, in developing countries, tax level differences are correlated to some extent with the degree of openness measured by imports as a percentage of gross national product. While listing a few possible reasons for this finding, Hinrichs does not offer much empirical support for his reasoning. This paper gives detailed consideration to some of the factors likely to affect tax levels in developing countries.2 While important gaps remain to be covered, our results suggest that the availability of taxable bases is a more important determinant of tax levels in developing countries than variations in the demand for government expenditures. In developed countries, variations in tax levels suggest that demand factors come into play.3 This conclusion is based on our findings that factors measuring tax administrative capacity, while not very meaningful as indicators of demand for public services, are highly significant in explaining the tax ratios in developing countries. The introduction of these variables enables us to explain about 45 percent of the variation in the ratios.