Drivers of the Tax Effort: Evidence from a Large Panel

Abstract

This paper assesses the drivers of tax effort in a sample of 122 countries from 1980 to 2017, using both the Bird and Frank indices to measure tax effort. Our focus is on five blocks of determinants—namely, economic, fiscal, openness, structural, and political. We find that tax effort is influenced by all blocks, although results differ per income group. Tax effort in advanced economies is driven by all blocks of drivers except political variables, while openness, structural, and political blocks prevail in developing economies. There is no consistency regarding the determinants across the four regions (Latin America, Africa, Europe, and Asia). We also find that, during the first two decades under analysis, tax effort is mainly associated with both higher levels of countries’ tax revenues and the role of the agricultural sector in the economy. However, from 1999 onwards, the determinants are mainly driven by left-wing governments and the economic and fiscal blocks of variables. Our results are robust for a battery of sensitivity and robustness tests. Taken together, our findings point to the existence of heterogeneous impacts, which implies that policies resulting in improvements in the level of tax effort can affect countries in diverse ways.