Understanding Multidimensional Tax Systems
37 Pages Posted: 11 Jul 2010 Last revised: 6 Feb 2011
Date Written: June 30, 2010
Income tax systems are multi-dimensional, and ignoring their non-rate aspects can introduce bias into cross-country empirical estimation of the impact of taxation. We analyze 10 non-rate tax system aspects, codified based on recent OECD reports. We find that a single factor (which we call Dispersed Responsibility), related to the role of taxpayers and third parties in tax collection, can reasonably summarize the cross-country covariation, and offer it as a parsimonious measure of non-rate tax system dimensions for future empirical analysis. We also ascertain that a standard measure of trust in government is positively associated, holding other determinants constant, with greater administrator coverage and administrative assessment, as well as more serious sanctions for non-compliance. Ethnic heterogeneity, individualism, and a history of external conflict also can explain certain aspects of tax systems. We find that countries with greater trust in government score lower on Dispersed Responsibility. Finally, we find that adding a measure of the number of tax authority employees can eliminate the otherwise significant positive estimated coefficient of GDP per capita on the tax level, and attracts a significant positive correlation itself, suggesting that the extent of tax administration and enforcement is part of the story that explains the enduring statistical regularity between tax levels and per capita income.
Keywords: tax administration, tax enforcement, cross-country
JEL Classification: C72, M41
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