A New Approach to Measuring Tax Effort

Abstract

This paper attempts to extend the theoretical and empirical methodology employed in previous literature, by proposing a utility maximization process to estimate the optimal tax revenue from a sample of 30 countries. It is shown that an optimal tax system is defined solely by two crucial determining factors: The productive capacity of the country (GDP) and consumers' preferences (consumption spending). All the other variables can be disregarded, as macroeconomic determinants (GDP, consumption) tend to capture the impact of all the remaining factors on tax revenue. It is also shown that our utility maximization method generates tax-effort indices which do not differ significantly from those of IMF and World Bank studies. The actual tax burden for most of the sample countries is shown to be below its optimal level. As expected, the tax-effort performance of each of the sample countries appears to be affected by the variety of approaches employed throughout the text.

What are the drivers of tax capacity in sub-Saharan Africa?

“…While these approaches are informative on how tax performance compares to some baseline standard, they are limited in identifying the sources of over-or under-performance. It is worth remembering that these measures are based on comparison of performance to some averages for other countries rather than an 'optimization' based on factors specific to an individual country (as in Dalamagas et al 2019)-these factors are swept up in the residual.…”

Determinants of Tax Capacity for a Territory (The Case of the Russian Federal Districts)

“…The importance of taking into account the relationship between the development of institutions and the amount of tax revenues was also confirmed by Bird et al (2008). A recent study by Dalamagas et al (2019) justified the predominant influence on tax revenues of two economic factors: GDP as a characteristic of production potential and consumer preferences. Despite the numerous tax capacity models available, the architecture of tax systems in many developing countries is characterized by paradoxes (Gordon and Li, 2009).…”

The Greek VAT Gap: The Influence of Individual Economic Sectors

“…Regarding the identified difficulty of taxing Agricultural activities, there is an agreement with Dalamagas et al (2019), Godin and Hindriks (2015), Thackray and Ueda (2014), Crivelly and Gupta (2014), Botlhole et al (2012), Martinez-Vazquez and Bird (2011), Pessino and Fenochietto (2010), Keen and Lockwood (2010), Aizenman and Jinjirak (2008), Bird et al (2008), Gupta (2007), Bird et al (2004), Ebrill et al (2001). Only some of the researchers (CASE 2020; Piancastelli and Thirlwall 2020; Motsatsi 2018; Ufier 2014) found the relationship to not be statistically significant, while even more rare was the existence of a negative and statistically significant relationship between agriculture and tax revenues such as in Agbeyegbe, Stotsky, and WoldeMariam (2014), who specifically focused on sub-Saharan Africa, where most of the agricultural production is exported to and not produced internally.…”

“…In international literature, special emphasis has been given to whether or not agriculture and its share of an economy's GDP affects tax evasion and the VAT gap. Such studies include those of the CASE institute (2020), Piancastelli and Thirlwall (2020), Dalamagas, Palaios, and Tantos (2019), Motsatsi (2018), Cnossen (2018), Zidkova (2016), Godin and Hindriks (2015), Thackray και Ueda (2014), Crivelly and Gupta (2014), Betliy (2014), Ufier (2014), Botlhole, Asafu-Adjaye, and Carmignani (2012), Martinez-Vazquez and Bird (2011), Pessino and Fenochietto (2010), Keen and Lockwood (2010), Aizenman και Jinjirak (2008), Bird, Martinez-Vazquez, andTorgler (2008), Gupta (2007), Bird et al (2004) and Ebrill et al (2001). The results from each of these studies varied greatly, mainly due to the fact that the agricultural sector is hard to tax and most of the studies concern crosscountry data.…”