Annex I. Estimating Tax Frontier and Tax Potential
Step 1: Estimate the tax frontier from a cross-country panel data set
yit is the log of the rax revenue-to-GDP ratio for country i at period year t
Xit is a vector of independent variables that affect yit
μit is the inefficiency, which is correlated with Xit, but independent from ϑit, and if is the residual, and normal distribution with N(0,1)
Step 2: Determine the tax effort
Step 3: Determine the tax frontier and tax potential
Data and Variables
Log of tax to GDP: World Economic Outlook (WEO)
Log of tax on goods and services to GDP: WEO
Lag of log of real GDP per capita: WEO
Lag of log of real GDP per capita squared: WTLO
Trade openness—sum of imports and exports in percent of GDP: WEO
Agriculture: Value added of agriculture in percent of GDP: World Bank, World Development Indicators (WDI)
Gini coefficient: WDI
Oil: dummy for oil exporters
General Government: dummy for General Government tax revenues.
Corruption and Government Effectiveness: Worldwide Governance Indicators (WGI).
Prepared by Gabriel Léost.
We follow the estimation approach in the October 2017 SSA regional Economic Outlook “The Impact of Fiscal Consolidation on Growth in Sub-Saharan Africa” and the April 2018 SSA Regional Economic Outlook “Domestic Revenue Mobilization in SSA: What Are the Possibilities?”
See the November 2019 mission on Progress in tax and customs administrations reforms (Clark, Montagnat-Rentier, de Santis, Wood and Lesprit).