Abstract
Abstract This paper measures the tax effort of a group of fifty-nine developed and developing countries over the period 1996-2015 by comparing a country’s actual tax/GDP ratio with the ratio predicted derived from an international tax function which relates tax revenue to various measures of a country’s taxable capacity such as the level of per capita income; the share of trade in GDP; the productive structure, and the level of financial deepening. The tax function is estimated using cross section data; pooled time series/cross section data, and panel data using a fixed effects estimator. The results are compared and show a range of tax effort from South Africa with the highest effort and Switzerland with the lowest effort. Implications for policy are drawn. The paper is critical of studies that include institutional variables (and other variables not related to the tax base of countries) to measure tax effort when they are really explanations of why the tax ratio differs between countries not of tax effort itself.
Highlights
Almost all countries – both developed and developing – require more tax revenue for the provision of public goods and for tackling poverty
Governments must borrow which increases public debt, and may cause fiscal crisis in the future if debt becomes too high as a proportion of gross domestic product (GDP), and countries find difficulty in repaying
A second objection of Bird (1975) is that since the estimation of tax revenue comes from cross section or panel data, inferences cannot be drawn for individual countries
Summary
Almost all countries – both developed and developing – require more tax revenue for the provision of public goods and for tackling poverty. By “demand” Bird means the willingness to tax, and he makes the same argument with respect to other variables (as well as per capita income) such as the share of trade, agriculture and mining in GDP He goes on ‘the distinction between capacity and willingness is a terribly fuzzy one: one might say that “capacity” without “willingness” is not really “capacity” – or “effective capacity”, if I may coin a term – at all’. A second objection of Bird (1975) is that since the estimation of tax revenue comes from cross section or panel data, inferences cannot be drawn for individual countries He states that ‘there is no meaningful sense in which the average experience measured by cross section analysis can be considered as a standard of comparison’ - - - ‘undue attention to such international comparisons is more likely to detract from, than illuminate, the needed analysis of problems and policies in individual developing countries’.
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