Trends and Drivers of Tax Effort: International Empirical Evidence

Abstract

This paper aims to identify the tax effort and its macroeconomic determinants in a sample composed of 13 countries from the MENA region and European countries using a set of macroeconomic variables considered by previous studies. This study employs two empirical methods to capture tax effort, and to analyze macroeconomic determinants of tax effort. Firstly, the paper uses a panel-stochastic frontier method to identify the tax effort and inefficiency term. Then, it uses a panel data regression model to analyze the determinants of tax effort in the years between 2005 to 2013. However, the selected sample includes two groups; the first group involves 6 European countries known with their high tax collections and low corruption. And the second group contains 7 developing countries with low tax collections and high corruption levels from the MENA region. The main findings of the study indicate that trade openness, inflation, and corruption are vital determinants for tax effort in sample countries. It is also found that developed countries have a higher tax effort than developing countries in general. However, Algeria has the most efficient tax administration with more than 98% tax effort, while Jordan is the least efficient among sample countries with 75% tax effort.

Keywords: Tax Effort, Macroeconomic Variables, Stochastic Frontier, Panel Data

JEL Classification: E6, C33, E31, H2