Societal Institutions and Tax Effort in Developing Countries

Abstract

The main theme of this paper is that a more legitimate and responsive state appears to be an essential precondition for a more adequate level of tax effort in developing countries. While at first glance giving such advice to poor countries seeking to increase their tax ratios may not seem more helpful than telling them to find oil, it is presumably more feasible for people to improve their governing institutions than to rearrange nature's bounty. Furthermore, improving social institutions, such as enhancing the rule of law and reducing corruption, may not take longer nor be necessarily more difficult than changing the opportunities for tax economy or the weight of imports and exports in GDP. The most important contribution of this paper is to extend the conventional model of tax effort by showing that not only do supply factors matter, but that societal institutions (demand factors) also determine tax effort to a significant level.

Keywords: Tax effort, societal institutions, developing countries

JEL Classification: H11, H20, O17