Tax Effort in Developing Countries: Where is Sri Lanka?

Harsha Konara Mudiyanselage, Anu Rammohan, Shawn Xiaoguang Chen

Abstract


This paper investigates the problem of the declining tax/gross domestic product (GDP) ratio in Sri Lanka by estimating the tax efforts of lower-middle-income countries (LMICs). Using a panel data set from 1990-2014 with two stochastic frontier models, we reveal that Sri Lanka’s tax effort declined during that period. Although the two different stochastic frontier analysis (SFA) models used in this paper produce different tax effort estimates, both models show a decline in tax effort in Sri Lanka. Estimations of personal income tax using available micro-level income data reiterate the low level of tax effort in Sri Lanka at present. We further analyze reasons for the weak tax effort in Sri Lanka and propose appropriate policy recommendations.

Keywords: Tax Effort, Stochastic Frontier Approach, Sri Lanka.


Full Text:

PDF

References


Aigner, D. J., Knox Lovell, C. A., & Schmidt, P. (1977). Formulation and estimation of stochastic frontier production function models. Journal of Econometrics, 6(1), 21-37. https://doi.org/10.1016/0304-4076(77)90052-5

Aizenman, J., & Jinjarak, Y. (2009). Globalisation and developing countries – A shrinking tax base? The Journal of Development Studies, 45(5), 653-671. https://doi.org/10.1080/00220380802582338

Alfirman, L. (2003). Estimating stochastic frontier tax potential: Can Indonesian local governments increase tax revenues under decentralization? (Discussion Papers in Economics, Working Paper No. 03-19). Boulder, CO: University of Colorado at Boulder. Retrieved from https://www.colorado.edu/economics/sites/default/files/attached-files/wp03-19.pdf

Alonso, J. A., & Garcimartín, C. (2011). Does Aid Hinder Tax Efforts? More Evidence (CREDIT Research Paper, no. 11/04). Nottingham, England: University of Nottingham. Retrieved from https://www.academia.edu/17712859/Does_Aid_Hinder_Tax_Efforts_More_Evidence

Ansari, M. (1982). Determinants of Tax Ratio: A Cross-Country Analysis. Economic and Political Weekly, 17(25), 1035-1042. Retrieved from https://www.jstor.org/stable/4371045?seq=1#references_tab_contents

Battese, G. E., & Coelli, T. J. (1988). Prediction of firm-level technical efficiencies with a generalized frontier production function and panel data. Journal of Econometrics, 38(3), 387-399. https://doi.org/10.1016/0304-4076(88)90053-X

Battese, G. E., & Coelli, T. J. (1992). Frontier production functions, technical efficiency and panel data: With application to paddy farmers in India. Journal of Productivity Analysis, 3(1/2), 153-169. https://doi.org/10.1007/BF00158774

Battese, G. E., & Coelli, T. J. (1995). A model for technical inefficiency effects in a stochastic frontier production function for panel data. Empirical Economics, 20, 325-332. Retrieved from http://pages.stern.nyu.edu/~wgreene/FrontierModeling/Reference-Papers/Battese-Coelli-1995.pdf

Bird, R. M., Martinez-Vazquez, J., & Torgler, B. (2004). Societal institutions and tax effort in developing countries (International Tax Program, Working Paper no. 04011). Retrieved from https://pdfs.semanticscholar.org/1c0d/71dc0ee67fcd2f43ef59dbaf54218ce5424d.pdf

Brun, J. F., & Diakité M. (2016). Tax potential and tax effort: An empirical estimation for non-resource tax revenue and VAT’s revenue (Études et Documents, n° 10). Clermont-Ferrand, France: Centre d'Études et de Recherches sur le Développement International (CERDI). Retrieved from https://halshs.archives-ouvertes.fr/halshs-01332053/document

Buehn, A., & Schneider, F. (2011). Corruption and the shadow economy: Like oil and vinegar, like water and fire? International Tax and Public Finance, 19(1), 172-194. https://doi.org/10.1007/s10797-011-9175-y

Central Bank of Sri Lanka. (2017). Annual report 2016. Colombo: Central Bank of Sri Lanka. Retrieved from https://www.cbsl.gov.lk/en/publications/economic-and-financial-reports/annual-reports/annual-report-2016

Chelliah, R. J., Hessel, J. B., & Margaret, R. K. (1975). Tax ratios and tax effort in developing countries, 1969-71. International Monetary Fund Staff Papers, 22(1), 187-205. DOI: 10.2307/3866592

Cornwell, C., Schmidt, P., & Sickles, R. C. (1990). Production frontiers with cross-sectional and time-series variation in efficiency levels. Journal of Econometrics, 46(1-2), 185-200. https://doi.org/10.1016/0304-4076(90)90054-W

Cyan, M., Martinez-Vazquez, J., & Vulovic, V. (2013). Measuring tax effort: Does the estimation approach matter and should effort be linked to expenditure goals? (International Center for Public Policy, Working Paper no. 13-08). Atlanta, GA: Andrew Young School of Policy Studies, Georgia State University. Retrieved from https://scholarworks.gsu.edu/cgi/viewcontent.cgi?article=1038&context=icepp

Davoodi, H. R., & Grigorian, D. A. (2007). Tax potential vs. tax effort: A cross-country analysis of Armenia’s stubbornly low tax collection (IMF Working Paper no. 07/106). Washington, D.C.: International Monetary Fund. Retrieved from https://www.imf.org/external/pubs/ft/wp/2007/wp07106.pdf

Department of Inland Revenue, Sri Lanka. Income Tax Acts. Retrieved from: http://www.ird.gov.lk/en/publications/sitepages/Acts.aspx?menuid=1601

Dreher, A., & Schneider, F. (2010). Corruption and the shadow economy: An empirical analysis. Public Choice, 144(Issue 1-2), 215-238. https://doi.org/10.1007/s11127-009-9513-0

Ehrhart, H. (2009). Assessing the relationship between democracy and domestic taxes in developing countries (Etudes et Documents, no. E 2009.30). Clermont-Ferrand, France: Centre d'Études et de Recherches sur le Développement International (CERDI). Retrieved from https://halshs.archives-ouvertes.fr/halshs-00553607/document

Eltony, M. N. (2002). Determinants of tax efforts in Arab Countries (Arab Planning Institute Working Paper, no. 207). Kuwait: Arab Planning Institute. Retrieved from http://www.arab-api.org/images/publication/pdfs/256/256_wps0207.pdf

Fenochietto, R., & Pessino, C. (2013). Understanding countries’ tax effort (IMF Working Paper no. 13/244. Washington, D.C.: International Monetary Fund. Retrieved from https://www.imf.org/external/pubs/ft/wp/2013/wp13244.pdf

Garg, S., Goyal, A., & Pal, R. (2016). Why tax effort falls short of tax capacity in Indian states: A stochastic frontier approach. Public Finance Review, 45(2), 232-259. https://doi.org/10.1177/1091142115623855

Greene, W. H. (1990). A Gamma-distributed stochastic frontier model. Journal of Econometrics, 46(1-2), 141-163. https://doi.org/10.1016/0304-4076(90)90052-U

Greene, W. H. (2005). Reconsidering heterogeneity in panel data estimators of the stochastic frontier model. Journal of Econometrics, 126(2), 269-303. https://doi.org/10.1016/j.jeconom.2004.05.003

Gupta, A. S. (2007). Determinants of tax revenue efforts in developing countries (IMF Working Paper no. 07/184). Washington, D.C.: International Monetary Fund. Retrieved from https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Determinants-of-Tax-Revenue-Efforts-in-Developing-Countries-21040

Javid, A. Y., & Arif, U. (2012). Analysis of revenue potential and revenue effort in developing Asian countries. The Pakistan Development Review, 51(4), 365-380. Retrieved from http://www.pide.org.pk/pdf/PDR/2012/Volume4/365-380.pdf

Jha, R. (2010). Fiscal policies and challenges in South Asia (ASARC Working Paper 2010/01). Canberra, Australia: Australia South Asia Research Centre (ASARC), Australian National University. Retrieved from https://acbee.crawford.anu.edu.au/acde/asarc/pdf/papers/2010/WP2010_01.pdf

Jondrow, J., Knox Lovell, C. A., Materov, I. S., & Schmidt, P. (1982). On the estimation of technical inefficiency in the stochastic frontier production function model. Journal of Econometrics, 19(2-3), 233-38. https://doi.org/10.1016/0304-4076(82)90004-5

Karakaplan, M. U., & Kutlu L. (2017). Endogeneity in panel stochastic frontier models: an application to the Japanese cotton spinning industry. Applied Economics, 49(59), 5935-5939. https://doi.org/10.1080/00036846.2017.1363861

Keen, M., & Mansour, M. (2009). Revenue mobilization in Sub-Saharan Africa: Challenges from globalization (IMF Working Paper no. 09/157). Washington, D.C.: International Monetary Fund. Retrieved from https://www.imf.org/external/pubs/ft/wp/2009/wp09157.pdf

Kelegama, S. (2010a). Anomalies in the taxation system in Sri Lanka: Need for reform and restructuring. n.p.: Institute of Policy Studies of Sri Lanka. Retrieved from https://www.scribd.com/doc/30433210/Anomalies-of-the-Tax-System-in-Sri-Lanka

Kelegama, S. (2010b, November 21). Tax issues – Current system not delivering needed revenue. Sunday Times. Retrieved from http://www.sundaytimes.lk/101121/BusinessTimes/bt10.html

Kumbhakar, S., & Knox Lovell, C. A. (2000). Stochastic frontier analysis. Cambridge, England: Cambridge University Press. https://doi.org/10.1017/CBO9781139174411

Kumbhakar, S. C., Lien, G., & Hardaker J. B. (2014). Technical efficiency in competing panel data models: a study of Norwegian grain farming. Journal of Productivity Analysis, 41(2), 321-37. https://doi.org/10.1007/s11123-012-0303-1

Kumbhakar S. C., Wang, H.-J., and Horncastle, A.P. (2015). A practitioner’s guide to stochastic frontier analysis using Stata. Cambridge, England: Cambridge University Press. https://doi.org/10.1017/CBO9781139342070

Langford, B., & Ohlenburg, T. (2015, August). Tax revenue potential and effort: An empirical investigation (IGC Working Paper S-43202-UGA-1, version 3). London, England: International Growth Centre. Retrieved from https://www.theigc.org/wp-content/uploads/2016/01/Langford-Ohlenburg-2016-Working-paper.pdf

Le, T.M., Moreno-Dodson, B., & Rojchaichaninthorn, J. (2008). Expanding taxable capacity and reaching revenue potential: Cross-country analysis (World Bank Policy Research Working Paper no, 4559). Washington, D.C.: The World Bank. https://doi.org/10.1596/1813-9450-4559

Leuthold, J. H. (1991). Tax shares in developing countries: A panel study. Journal of Development Economics, 35(1), 173-185. https://doi.org/10.1016/0304-3878(91)90072-4

Lotz, J. R., & Morss, E. R. (1967). Measuring “tax effort” in developing countries. International Monetary Fund Staff Papers, 14(3), 478-499. DOI: 10.2307/3866266

Lotz, J. R., & Morss, E. R. (1970). A theory of tax level determinants for developing countries. Economic Development and Cultural Change, 18(3), 328-341. https://doi.org/10.1086/450436

Medina, L., & Schneider, F. (2018). Shadow economies around the world: What did we learn over the last 20 years? (IMF Working Paper No. 18/17). Washington, D.C.: International Monetary Fund. Retrieved from https://www.imf.org/en/Publications/WP/Issues/2018/01/25/Shadow-Economies-Around-the-World-What-Did-We-Learn-Over-the-Last-20-Years-45583

Ndiaye, M. B. O., & Korsu, R. D. (2011). Tax effort in ECOWAS countries. n.p.: Mimeo. Retrieved from http://www.crepol.org/images/my_pdf/july-paper-09.pdf

Nerudova, D., & Dobranschi, M. (2019). Alternative method to measure the VAT gap in the EU: Stochastic tax frontier model approach. PLoS ONE, 14(1): e0211317. https://doi.org/10.1371/journal.pone.0211317

Pessino, C., & Fenochietto, R. (2010). Determining countries’ tax effort, Hacienda Pública Española/Revista de Economía Pública, 195, 65-87. Retrieved from https://www.academia.edu/9527922/Determining_countries_tax_effort

Presidential Tax Commission. (2010). Presidential Taxation Commission report. Colombo, Sri Lanka: Ministry of Finance.

Schmidt, P., & Sickles, R. C. (1984). Production frontiers and panel data. Journal of Business & Economic Statistics, 2(4), 367-374. https://doi.org/10.1080/07350015.1984.10509410

Shin, K. (1969). International difference in tax ratio. The Review of Economics and Statistics, 51(2), 213-220. https://doi.org/10.2307/1926733

Stevenson, R. E. (1980). Likelihood functions for generalized stochastic frontier estimation. Journal of Econometrics, 13(1), 57-66. https://doi.org/10.1016/0304-4076(80)90042-1

Stotsky, J. G., & WoldeMariam, A. (1997). Tax effort in Sub-Saharan Africa (IMF Working Paper no. 97/107). Washington, D.C.: International Monetary Fund. Retrieved from https://www.imf.org/external/pubs/ft/wp/wp97107.pdf

Tait, A. A., Grätz, W. L. M., & Eichengreen, B. J. (1979). International comparisons of taxation for selected developing countries, 1972–76. International Monetary Fund Staff Papers, 26(1), 123-156. DOI: 10.2307/3866567

Tanzi, V. (1992). Structural factors and tax revenue in developing countries: A decade of evidence. In I. Goldin and L. A. Winters (Eds.), Open economies: Structural adjustment and agriculture (pp. 267-285). Cambridge, England: Cambridge University Press.

Vallés-Giménez, J., & Zarate-Marco, A. (2017). Tax effort of local governments and its determinants: The Spanish case. Annals of Economics and Finance, 18(2), 323-348. Retrieved from http://aeconf.com/Articles/Nov2017/aef180205.pdf

Waidyasekera, D. D. M. (2017). Taxation: Current trends and perspectives. In S. Kelegama (Ed.), Tax policy in Sri Lanka: Economic perspectives (pp. 43-102). Colombo, Sri Lanka: Institute of Policy Studies of Sri Lanka. Retrieved from http://www.ips.lk/wp-content/uploads/2017/10/Tax-Policy-in-SL-ips.pdf

Wijewardena, W. A. (2019, July 08). Sri Lanka’s elevation to upper middle income status: Attainment is welcome but challenges are more. Daily FT. Retrieved from: http://www.ft.lk/columns/Sri-Lanka-s-elevation-to-upper-middle-income-status-Attainment-is-welcome-but-challenges-are-more/4-681449

World Bank (2016). World Bank country and lending groups. Retrieved from https://datahelpdesk.worldbank.org/knowledgebase/articles/906519

Zárate-Marco, A. & Vallés-Giménez, J. (2019). Regional tax effort in Spain. Economics, 13(2019-31), 1-32. http://doi.org/10.5018/economics-ejournal.ja.2019-31

Zarra-Nezhad, M., Ansari, M. A, & Moradi, M. (2016). Determinants of tax revenue: Does liberalization boost or decline it? Journal of Economic Cooperation and Development, 37(2), 103-126. Retrieved from https://www.researchgate.net/publication/309427057_Determinants_of_Tax_Revenue_Does_Liberalization_Boost_or_Decline_It


Refbacks

  • There are currently no refbacks.


Copyright ©  Journal of Tax Administration. All rights reserved. | Hosted by Docuracy Ltd | Powered by Open Journal Systems