Page 3 - Working Paper (Narrowing Tax Gap: Cross Countries Experience)

DDTC Working Paper 0915
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1. Introduction Lotz and Morss published one of the first
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articles to study the international tax ratio, using
ANAlyziNG ThE TAx GAp as explanatory variables per capita Gross National
providEs A usEful Tool for Product (GNP) and trade (represented by the ratio
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uNdErsTANdiNG ThE rElATivE of exports plus imports to total GNP). Gupta used
sizE ANd NATurE of NoN- dynamic panel regression analysis and identified
CompliANCE that some structural factors, such as per capita GDP,
the share of agriculture in GDP, trade openness,
and foreign aid, significantly affect tax revenue.
Gupta explored most of the data from the World
This paper substantively measures “tax gap” or
Bank World Development Indicators. Davoodi and
the difference between the amounts of tax collection
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Grigorian looked at extended the conventional
that tax authority should have been collected
determinants of tax revenue potential, specifically
against what is actually collected. Tax capacity
to the case of Armenian, to include measures
refers to the maximum level of tax revenue that a
of institutional quality and informal economic
country can achieve. In many cases, tax capacity
activity in a panel data framework and showed
measures the predicted tax to gross domestic
that institutional improvements as well as policy
product ratio that can be estimated with the
initiatives designed to reduce the size of informal
regression, taking into account a country’s specific
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economic, demographic and institutional features. economic activity are important in raising tax
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revenue performance. Alfirman analyzed tax
Meanwhile, tax effort estimates the ratio between
capacity in only one country (Indonesia) to
actual tax revenue and capacity. Previous studies
conclude that local governments were far from
on tax capacity and effort have utilized both cross-
their tax capacity and could increase their tax
section and time series models into consideration.
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Similar to our earlier paper , previous theoretical revenue.
and empirical literature on tax revenue started the
There are several considerations that most
analysis by trying to find out the determinants of
governments undertake imminent measurements
tax revenues where they include several variables
and strategies to improve their tax collection
such as level of the economy (i.e. Gross Domestic
leading to narrowing the tax gap. First is effort
Products, per capita GDP, level of unemployment,
to lessen tax evasion, which could come from
etc.), the degree of openness of an economy, the
voluntary and involuntary tax non-compliance.
ratio of public debt to GDP, the level of education
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According to Schneider , the activity to evade
of a country, and institutional factors as corruption
from paying taxes in the developed countries
and governance.
reaches around 14-16 percent of GDP. Meanwhile,
Tax collection is considered the most reliable the figure shows up to a quarter to 44 percent of
way to finance public expenditures. Most countries GDP in developing countries. Second argument is
still rely on tax revenue as their primary source to attract more capital repatriation. Governments
of income. However, many developing countries around the world try to repatriate capitals that
still experience a chronic gap between the actual have been stashed overseas by creating more
and desirable levels of tax intakes due to large tax incentive and also coordinating with other
informal economy and tax evasion problems countries through bilateral tax treaty. The third
(e.g. no reporting and under-reporting). Tax is related to minimizing illegal profit shifting to
reforms covering institutional and administrative other countries. The fourth is governments’ budget
matters are needed to close this gap, but such processes where tax amnesty program tends to
reforms cannot be the same for all countries. The be associated with the policy of budgeting politics
development of a tax effort index, relating the especially to deal with the growing deficit of state
actual tax revenues of a country to its estimated budget.
taxable capacity, provides us with a tempting
measure, which considers country specific fiscal, 5 Lotz, Jorgen R and Elliott R. Morss, 1967,”Measuring Tax Effort in
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demographic, and institutional characteristics. Developing Countries” Staff paper- International Monetary Fund, 14:3,
pp. 478-99.
6 Gupta, Abhijit Sen, 2007,”Determinants of Tax Revenue Efforts in
Developing Countries” IMF Working Paper, No: WP/07/184 (July).
2 Le, Tuan Minh, Blanca Moreno-Dodson, and Jeep Rojchaichaninthorn, 7 Davoodi, Hamid R and David A. Grigorian, 2007,”Tax Potential vs
2008,”Expanding Taxable Capacity and Revenue Potential: Cross- Tax Effort. A Cross Country Analysis of Armenia’s stubbornly low tax
Country Analysis” WB Policy Research Working Paper, PREM. collection,” IMF Working Paper No WP/07/106.
3 Poesoro, Adri and Bawono Kristiaji, 2013,”Myths and Realities of Tax 8 Alfirman, L., 2003,”Estimating Stochastic Frontier Tax Potential:
Performance under Semi-Autonomous Revenue Authorities (SARA)”, Can Indonesian Local Governments Increase Tax Revenues under
DDTC Working Paper No.0213. Decentralization?” Department of Economics, University of Colorado at
4 Le, Tuan Minh, Blanca Moreno-Dodson, and Jeep Rojchaichaninthorn, Boulder, Colorado, Working Paper No. 03-19.
2012,”Tax Capacity and Tax Effort: Extended Cross-Country Analysis 9 Scheneider, F, 2005,”Shadow Economies around the World: What Do
1994-2009” WB Policy Research Working Paper, PREM. We Really Know?” European Journal of Political Economy 21: 598-642.