The Determinants of Tax Revenue and Tax Effort in Developed and Developing Countries: Theory and New Evidence 1996-2015

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.