The major results of a study of tax ratios and tax effort in developing countries, undertaken by the Fund's Fiscal Affairs Department, were reported in Staff Papers, July 1971.1 The time-series section of the study was based on a comparison of data for 1953–55 with those for 1966–68 for a sample of 30 developing countries, while the cross-section analysis, based on averages for 1966–68, covered 50 countries. The study first outlined the major changes in the levels and composition of taxes between the periods 1953–55 and 1966–68 and then examined in detail the tax structure in the 50 countries in the latter period. More importantly, the study attempted to measure relative tax effort in the sample countries for the period 1966–68. For this purpose, regression analysis was used on the cross-section data to quantify the influence of objective conditions and economic factors on the tax ratio so that the residuals could be used with proper adjustments to construct indices of relative tax effort for developing countries.
Since the Fund staff and others have frequently used the results of the 1971 study, in assessing tax effort in several member countries, it has been considered desirable to update the study by using more recent data. A repeat study on data for a later period also enables a check to be made on the stability, over time, of the coefficients in the regression equations. This paper is basically designed to update the major results of the cross-section analysis of the 1971 study. An attempt was made to canvass data for the period 1969–71 for the same 50 countries 2 that were covered by the previous study; however, as adequate data could not be obtained for three of those countries (Chad, Somalia, and Viet-Nam), this study is based on a sample of 47 countries.
The most interesting general conclusion of this study is that the estimated coefficients of the explanatory variables in the alternative equations for the later period do not differ greatly from those in the corresponding equations for the earlier period, thereby adding to the degree of confidence in the results of the analysis. Also, in general, the ranking of countries with respect to tax effort in the two periods does not differ markedly.
In this paper, Section I indicates the sources and coverage of the data. Section II presents the basic figures on tax levels and re-estimates the equations contained in the previous study; these results are then used to derive more up-to-date indices of tax effort. Section III discusses the composition of tax revenues in the sample countries and the regional variations in tax levels and composition.
Mr. Chelliah, Chief of the Fiscal Analysis Division of the Fiscal Affairs Department, is a graduate of Madras University and of the University of Pittsburgh. He was formerly Professor of Economics at the University of Rajasthan and at the Osmania University, Hyderabad. He served as Consultant to the UN Economic Commission for Asia and the Far East, in Bangkok, and for some time was its Regional Fiscal Advisor. He is the author of Fiscal Policy in Underdeveloped Countries and a number of articles in economic journals.
Mr. Baas, economist in the Fiscal Affairs Department when this paper was prepared and presently in the European Department, studied and taught at the University of Auckland, New Zealand, before joining the Fund.
Ms. Kelly, economist in the Fiscal Analysis Division of the Fiscal Affairs Department, is a graduate of the University of New England (Australia) and Australian National University. She is currently on leave from the Reserve Bank of Australia.
Raja J. Chelliah, “Trends in Taxation in Developing Countries,” Staff Papers, Vol. 18 (July 1971), pp. 254–331.
Only 49 countries were included in the regressions in the previous study.
All these countries formed part of the sample of the earlier study.
Data for 1971 were not available for all countries. Table 6, in Appendix I, indicates the years covered as well as the levels of government included for each country.
In line with the previous study, the gross national product (GNP) was used as the income measure in the denominator except for Mali, Nepal, Senegal, and Upper Volta, for which only gross domestic product (GDP) data were available.
Data on exports, imports, and the shares of different production sectors in GDP for 1966–68, however, were not revised.
Except for Argentina, all countries covered in the present study have a per capita income below US$1,000. (See Table 3.) Given the wide coverage, the sample may be said to include most low-income countries.
See Organization for Economic Cooperation and Development, Revenue Statistics of OECD Member Countries, 1965–1971 (Paris, 1973).
Chelliah, op. cit., pp. 280–81.
Ibid., pp. 291–96.
Ibid., pp. 315–16.
Using the data for the period 1966–68, it was found to be significant at the 0.22 level.
The rank correlation coefficient was 0.96. As explained in the previous study, rankings of countries are not so important as the values of the tax effort indices. The effort indices computed using equation (5) are given in Table 7, in Appendix I.
For purposes of comparison, tax effort indices for these countries for the period 1966–68 are reproduced from the 1971 study (Chelliah, op. cit., Table 9, pp. 302–303).
For a detailed discussion of limitations, see Chelliah, op. cit., pp. 298–300.
Of the 21 countries that have tax ratios above 15.1 per cent, 17 are among the 22 countries that have tax effort indices greater than unity.
Brazil, Egypt, Ivory Coast, Malaysia, Tunisia, and Zaïre.
For Mexico, tax data for the latter period covers only the Central Government, whereas those for the earlier period were meant to cover local governments as well. It is understood that the Mexican authorities were not satisfied with tax data for general government reported earlier and are in the process of revising them; meanwhile, official data are available only for the Central Government. However, if comparable, nonauthoritative figures for the general government were used for 1969–71, the tax ratio would be 11.02 per cent and the tax effort index would be 0.76. For Upper Volta, figures for only two years were used in the previous study; and for Mali and Tanzania, GDP figures have been revised substantially for the earlier period.
The correlation between the rankings according to the effort indices for the two periods is 0.88. Of the 47 countries compared, 30 remained in the same quartiles as before, 9 moved up, and 8 moved down (mostly to the next quartile).
The rise in the ratio is explained by the fact that whereas tax revenue increased at 21 per cent per annum between 1969 and 1970, GDP at current prices is estimated to have increased by only 4.5 per cent a year.
As in the previous study, excise and sales tax figures include excises and sales taxes on imports, as they could not be separated out. In some countries, such as Chad, Mali, and Senegal, turnover taxes on imports bring a substantial part of revenue from sales taxes. Thus, taxes on internal transactions should not be thought to apply only to domestically produced goods.
Royalties on minerals, it may be recalled, are treated like income taxes.
See Chelliah, op. cit., p. 313, for details of the five regional groupings.