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Working Paper Series - The Determinants of Tax Effort in Arab countries



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The Determinants of Tax Effort in Arab countries


Volume : 0

No : 0

ISSN : WPS0207

Publisher : Arab Planning Institute - Kuwait

Author (s) : M. Nagy Eltony 

Published Date : 1/1/2002


Contents :
Many developing countriesface difficulties in generating sufficient revenues for public expenditure. Insome Arab countries, budget deficits and the unproductive use of publicexpenditures have limited the critical investments in both human resources andbasic infrastructure that are necessary for providing a foundation for sustainableeconomic growth. In the last two decades, many Arab countries have embarked oneconomic and financial reform programs some of which are supported by theInternational Monetary Fund. These reform programs have usually includedmeasures to raise tax revenues and to restructure tax systems.
The purpose of this study is to examine the determinants of tax revenue sharesand to construct an index of tax effort for the Arab countries. This studymakes use of pooled time-series and cross-sectional country data for the1994-2000 time period for 16 Arab countries. The index of tax effort isconstructed as the ratio of actual tax share to the predicted (or potential)tax share, as in previous work on this topic, Stotsky and WoldeMariam (1997),Tanzi (1981, 1987, 1992), Leuthold (1991) and Tait and Eichengreen (1978) amongothers.
It should be emphasized here that the main purpose of pan Arab comparisons oftax effort is to reveal whether an Arab country is limited in its revenuecollections by a low capacity to generate tax revenues or by an unwillingnessto use the available tax capacity to fund public expenditures. Another reasonis to give guidance as to the proper mix of fiscal policy to undertake in theevent of a budget deficit. If an Arab country facing a budget deficit imbalancewere already making the maximum use of its taxable capacity, this would suggestthat regaining budget balance would require expenditure rationing rather thantax increases.
The next section summarizes tax revenue performance in Arab countries. Section3 presents the model and reviews the literature on previous studies anddiscusses the different approaches that have been used to examine thedeterminants of tax effort. Section 4 discusses the empirical results whilesection 5 gives the conclusions and some policy implications.

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