Exploring the Deep Determinants of Tax Effort

Abstract

The tax effort literature explains cross-country variation in tax revenues using various determinants of tax revenues. To date, this literature has viewed tax effort primarily as a function of current economic and political circumstances; proximate determinants of tax effort. Borrowing from the development economics literature, this paper explores ‘deep determinants’ of tax effort. I consider how geography, formal institutions, and informal institutions influence tax effort in a large cross-section of countries. A theory based on ‘institutional efficiency’ is proposed that may partly explain the poor tax effort in many developing countries.

Keywords: tax effort, deep determinants, geography, institutions

JEL Classification: H20, B52