Estimating Tax Effort: New Evidence from a Heterogeneous Panel

Abstract We provide new evidence on countries’ tax effort based on a self-constructed heterogeneous panel of 114 countries, covering the period from 1995 to 2020. We apply the stochastic frontier model of Kumbhakar et al. (2014) to disentangle country-specific fixed effects from persistent and time-varying components of tax effort. This allows us to mitigate the misspecification bias of other studies that treat persistent effort as either individual heterogeneity or a time-varying phenomenon. Furthermore, we control for tax rate differences across countries, improving accuracy and interpretation of the previous estimates. We find that 1) the level of development, trade volume, education, income inequality, and the ease of tax collection are important determinants for tax collection; 2) countries with historically strong indicators of governance, rule of law, and control of corruption have a higher level of persistent effort; 3) there is a non-linear relationship between time-varying inefficiency and statutory tax rates. JEL Classification : H21, H22, H26, C23, G40