Page 9 - Working Paper (Narrowing Tax Gap: Cross Countries Experience)
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DDTC Working Paper 0915

                   equals predicted tax capacity. Countries above the   on its tax policies and administrations. 23
                   45-degree line are the ones with a high tax effort
                                                                     Table 3 - Summary of Several Countries by Tax Effort
                   (actual  taxes  are  higher  than  predicted  taxes).
                                                                               Index (Average 1994-2009)
                   Conversely,  the  countries  located  below  the  line
                   are the one collecting  below their  tax  capacity.
                                                                                 Country              Tax Effort
                   Most of developed countries are on and above the
                   45-degree line.
                                                                     Indonesia                              0.9
                                                                     China                                 0.48
                      Figure  4  below presents  the actual  tax  ratio
                   and tax  capacity  on average  across all  countries   South Africa                     1.43
                   from 1994 to 2009. Tax capacity was above actual   R. Korea                             0.89
                   tax ratio from 1996 to 2004; while, the pattern is   Malaysia                           0.82
                   reversed  afterwards.  Disaggregating  into  several
                                                                     Thailand                              0.97
                   regions,  from  the  paper  we  recognize  that  OECD
                                                                     Philippines                           0.91
                   countries has almost flat at the value of 1 meaning
                   that his group actual and predicted taxes are very   Vietnam                            1.31
                   similar.  In  East  Asia  (where  Indonesia  is  one  of   Japan                        0.47
                   them),  the  figure  is  below  one  after  the  Asian   Australia                      1.14
                   Financial Crisis as a result of economic downturn.   Canada                             0.76
                   As depicted from 2008, the gap is starting to widen
                                                                     New Zealand                           1.42
                   again. The declining trend in tax collection and the
                                                                     United States                         0.77
                   tax  effort  is  due  to  financial  and  economic  crisis
                   of  2008-2009; almost all  countries  experience   UK                                   1.10
                   turbulence in their  economy. At the same time,   India                                 0.88
                   many governments introduced stimulus  package     Morocco                               1.44
                   including tax incentives and lower tax rate, which
                                                                     Paraguay                              0.91
                   put additional downward pressure to tax revenues.
                                                                     Sri Lanka                             1.06
                   Comparing the two findings of Le, T.M. and Dodson
                                                                     Bolivia                               1.13
                   papers, countries with better institutional quality
                   (e.g.  bureaucracy  quality  or  corruption)  can   Egypt                               0.95
                   potentially raise tax collection without undue extra   Source: The Frazer Institute, 1997
                   burden on the economy.
                                                                       Similar  to  previous  paper  that  we  reviewed,
                    Figure 4 - Average Actual Tax Collection and Taxable   paper  made  by  Ricardo  Fenochietto  and  Carola
                              Capacity over 1994-2009               Pession  with  a  title  of  Understanding  Countries’
                     24                                             Tax  efforts also  present a  stochastic frontier tax
                                                                    analysis  model to determine  the tax  effort and
                                                                    capacity of 113 countries and the main determined
                     22                                             variables. Their empirical analysis  shows that
                                                                    most  OECD  countries  are  near  their  tax  capacity
                                                                    with a higher  tax  effort. High-income  countries
                                                                    (e.g. United States (0.69), United Kingdom (0.83),
                                                  Actual Tax/GDP
                     19                                             Canada (0.78) and Australia (0.72)) are all above 70
                                                  Predicted Tax/GDP
                     18                                             percent in the tax efforts. This finding is similar to
                                                                    findings from other tax capacity papers. Given the
                                                                    high tax capacity, they also appear to be efficient in
                         1994  1995  1996  1997  1998  1999  2000  2001  2002  2003  2004  2005  2006  2007  2008  2009  collecting taxes with low levels of evasion and very
                                                                    effective in public expenditures.
                   Note: Actual Tax/GDP is tax ratio and Predicted Tax/GDP is tax capacity
                                                                       Several  high  level  per  capita  GDP  countries,
                      In  addition,  we  also  present  summary  of  tax   such as Singapore (0.33), Korea (0.49), and Japan
                   effort index calculated by Le, T.M., and Dodson in   (0.53)  are  exceptions  where  these  countries  are
                   several countries as appears on Table 3 below. East   operating far from their tax capacity. VAT rates in
                   Asian countries covering to name of few Indonesia,
                   China,  Republic  Korea,  Malaysia,  Philippines,
                                                                    23 It is also important that detailed analysis of tax gap in Indonesia be
                   and Japan have tax effort below par level of one.   conducted, which also takes into account tax performance at the sub-
                   Indonesia, for example, has tax effort index of 0.9.   national level and possible future tax receipts as a results of minimizing
                                                                    the scope of informal economy.
                   This figures tells that Indonesia still has room to
                                                                    24 Detail analysis could be found in Fenochietto, Ricardo and Carola
                   improve its tax collection through an enhancement   Pession,  2013,”Understanding Countries’ Tax  Effort”,  IMF Working
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