Page 8 - Working Paper (Narrowing Tax Gap: Cross Countries Experience)
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DDTC Working Paper 0915
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                                              Figure 3 - Tax Efforts, averages over 1994-2009
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                                          30

                                        Actual Tax/GDP  20




                                          10




                                                      10        20        30        40
                                                            Predicted Tax/GDP
                          Note: Predicted tax/GDP is taxable capacity. The line is the 45-degree line, which represents the points where the tax effort index is 1

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                   level of tax collection but high tax effort have less   revenues.  In the United States, tax expenditures
                                                                                  21
                   opportunity  to increase tax  revenues without   are high as well.  Other than these countries, most
                   possibly creating distortions  or  high  compliance   of the countries in this group are low to medium
                       16
                   costs .                                          income countries. These countries have potential
                                                                    to improve its tax revenues by reforming their tax
                      A high tax effort country is defined as the case
                                                                    policy and administration.
                   when a  tax  effort is above 1 implying that  the
                   country  well  utilizes  its  tax  base  to  increase  tax   It  should  be  noted  that  the  results  in  Le,  T.M
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                   revenues . A “low tax  effort”, on the other hand,   and  Dodson  (2008,  2012)  paper  needs  to  be
                   is the case when a  tax  effort index  is below  1,   interpreted with care due to potential  caveats  in
                   indicating that  the country may have a relatively   the modeling of tax  capacity  and effort, as well
                   substantial  scope  or  potential  to raise  tax   as  in  the  measurement  of  the  actual  tax-to-GDP
                   revenues.  In  Table  2  above,  Le,  Moreno-Dodson,   ratio. This  study can be complimentary to  but
                   and  Rojchaichaninthorn  (2012)  used  the  same   not substitute detailed analysis of a country’s tax
                   estimation technique as appear in their previous   system, which  can consider  the country’s overall
                   paper but incorporating larger dataset. The study   fiscal policy taking into account public expenditure
                   includes 110 developing and developed countries   needs  and  the  overall  level  of  development.  It  is
                   covers  longer  time  period  (1994-2009).  Model   recognized that making fundamental changes in a
                   specification that they created consists of possible   tax structure is a challenge due to possible public
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                   determinants   of  tax  revenue  as  a  share  of  GDP.   resistance and  political  weakness. The design of
                   However, the methodology  does  not consider     tax revenue reforms must be country specific and
                   possible effects of shadow economy to tax ratio. As   constructed after comprehensive analysis of the
                   mentioned above, the data is mainly extracted from   country’s taxable  capacity, revenue performance,
                   the  World  Bank’s  World  Development  Indicators   and  its  top leadership’s political  commitment.
                   Database and the International Country Risk Guide   Figure 3  extracted from Le, T.M and Dodson (2012)
                   (ICRG) database. 19                              shows relationship between the average values of
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                                                                    actual and predicted tax collection (tax capacity )
                      From  Table  2,  it  is  clear  that  most  of  OECD
                                                                    in percentage of GDP. The 45-degree line represents
                   countries  are in the quadrant  of  ‘high tax  effort’
                                                                    countries with equal tax effort between actual and
                   and  ‘high  tax  collection’.  Surprisingly,  the  United
                                                                    predicted. Along  this line, tax collection  exactly
                   State,  Japan,  Canada,  and  Republic  of  Korea  are
                   in  the ‘low  tax  effort’  and  ‘low  tax  collection’
                   quadrant. It should be noted that these countries   20 Thornton, John, 2007,”Fiscal decentralization and economic growth
                                                                    reconsidered” Journal of Urban Economics vol 61, pp. 64-70 and OECD,
                   have relatively  higher share of sub-national  tax
                                                                    2003,”Fiscal Relations across levels  of  government”,  OECD Economic
                                                                    Outlook 74, pp. 143-160.
                                                                    21 Eissa, nada and Hilary Williamson Hoynes, 2008,”Incentive and
                   16 Op.Cit., Le, Tuan Minh, Blanca Moreno-Dodson (2012).  Distributional Consequences of Tax Expenditure: Redistribution and Tax
                                                                    Expenditures: The Earned Income Tax credit” NBER Book Chapter.
                   17 Stotsky,  Janet G,  and Asegedech  Woldemariam, 1997,”Tax  Effort
                   in Sub-Saharan Africa” IMF Working Paper. The International Monetary   22 Tax capacity (predicted tax collection) is the estimated value of tax
                   Fund: Washington, DC.                            revenue calculated using the estimated coefficients from the regression
                                                                    results.  The specification takes tax revenues as a function of GDP per
                   18 Tax  ratio =  f(GDP percapita, Population Growth,  Trade Opennes,   capita,  population growth,  trade openness,  agriculture value  added
                   Agricultural value index, Corruption index, Bureaucracy quality).  (in percentage of GDP), corruption index, as well as regional and time
                   19 USAID has compilation of tax data from different sources.  dummies.
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