Tax Administration Capabilities and Revenue Extraction Efficiency in Sub-Saharan Africa: Evidence from a Panel Stochastic Frontier Model

Cyril Chimilila, Vincent Leyaro

Abstract


Using panel data for 42 countries from 1991 to 2019, and applying a panel stochastic frontier model, this study examines the capabilities and efficiency of tax administrations in sub-Saharan Africa (SSA). The estimation results show that macroeconomic variables, aid dependence, and governance structures affect tax efforts. In addition, we find strong evidence that tax revenue extraction efficiency is influenced by the resourcing of tax administrations and the allocation of those resources to core tax administration functions, such as tax audits. Furthermore, technical efficiency is influenced by internal operational efficiency, which tends to reduce revenue collection costs. This implies that the resourcing of the tax administration, the quality of employment, the allocation of human and other resources, the application of technologies (such as mobile payment) in order to simplify tax administration and reduce costs, and staff motivation are equally important when attempting to maximise revenue administration capabilities and efficiency.

Keywords: Tax Effort, Tax Administration Capability, Technical Efficiency, Panel Stochastic Frontier Model.

JEL Classifications: H20, H24


Full Text:

PDF

References


African Tax Administration Forum. (2017). African tax outlook 2017 (2nd ed.). Pretoria, South Africa: African Tax Administration Forum.

African Tax Administration Forum. (2019). African tax outlook 2018 (3rd ed.). Pretoria, South Africa: African Tax Administration Forum.

African Tax Administration Forum. (2020). African tax outlook 2020 (2020 ed.). Pretoria, South Africa: African Tax Administration Forum.

Allingham, M. G., & Sandmo, A. (1972). Income tax evasion: A theoretical analysis. Journal of Public Economics, 1(3-4), 323-338. https://doi.org/10.1016/0047-2727(72)90010-2

Alm, J., & Duncan, D. (2014). Estimating tax agency efficiency. Public Budgeting and Finance, 34(3), 92-110. https://doi.org/10.1111/pbaf.12043

Auty, R. (1993). Sustaining development in mineral economies: The resource curse thesis. London, England: Routledge.

Awasthi, R. & Engelschalk, M. (2018). Taxation and the shadow economy: How the tax system can stimulate and enforce the formalization of business activities (Policy Research Working Paper No. 8391). Washington, D.C.: World Bank Group.

Azulai, M., Bandiera, O., Blum, F., Kleven, H., La Ferrara, L., Padró, G., & Tejada, C. M. (2014). Evidence paper: State effectiveness, growth and development. London. England: The International Growth Centre.

Balamatsias, P. (2016). Democracy and taxation. Economics, 12(1), Article 20180027. https://doi.org/10.5018/economics-ejournal.ja.2018-27

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

Belmonte-Martin, I., Ortiz, L., & Polo, C. (2021). Local tax management in Spain: A study of the conditional efficiency of provincial tax agencies. Socio-Economic Planning Sciences, 78, Article 101057. https://doi.org/10.1016/j.seps.2021.101057

Bénabou, R., & Tirole, J. (2011). Identity, morals, and taboos: Beliefs as assets. The Quarterly Journal of Economics, 126(2), 805-855. https://doi.org/10.1093/qje/qjr002

Besley, T., & Persson, T. (2011). Pillars of prosperity: The political economics of development clusters. Princeton, NJ: Princeton University Press.

Besley, T., & Persson, T. (2014). Why do developing countries tax so little? Journal of Economic Perspectives, 28(4), 99-120. https://doi.org/10.1257/jep.28.4.99

Bird, R. M., & Martinez-Vazquez, J. (2008). Tax effort in developing countries and high income countries: The impact of corruption, voice and accountability. Economic Analysis & Policy, 38(1), 55-71.

Bird, R. M., Martinez-Vazquez, J., & Torgler, B. (2008), Tax effort in developing countries and high-income countries: The impact of corruption, voice and accountability. Economic Analysis and Policy, 38(1), 55-71. https://doi.org/10.1016/S0313-5926(08)50006-3

Bird, R. & Wallace, S. (2003). Is it really so hard to tax the hard-to-tax? The context and role of presumptive taxes (International Studies Program, Working Paper 03-16). Atlanta, Georgia: Andrew Young School of Policy Studies, Georgia State University.

Bird, R. M., & Zolt, E. M. (2005). The limited role of the personal income tax in developing countries. Journal of Asian Economics, 16(6), 928-946. https://doi.org/10.1016/j.asieco.2005.09.001

Chr. Michelsen Institute. (2016), The costs of corruption to the Mozambican economy: Why it is important to fight corruption in a climate of fiscal fragility (CMI Report, Number 6). Norway, Bergen: CMI.

Cingolani, L. (2013). The state of the state capacity: A review of concepts, evidence and measures (UNU-MERIT Working Paper Series No. 2013-053). Maastricht, The Netherlands: Maastricht Economic and Social Research Institute on Innovation and Technology, and Maastricht Graduate School of Governance.

Clist, P., & Morrissey, O. (2011). Aid and tax revenue: Signs of a positive effect since the 1980s. Journal of International Development, 23(2), 165-180. https://doi.org/10.1002/jid.1656

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

Crandall, W. (2010). Revenue administration: Performance measurement in tax administration. Washington D.C.: International Monetary Fund.

Crivelli, E., & Gupta, S. (2014). Resource blessing, revenue curse? Domestic revenue effort in resource-rich countries (IMF Working Paper No. 2014/005). Washington D.C.: International Monetary Fund.

Das-Gupta, A., Estrada, G. B., & Park, D. (2016). Measuring tax administration effectiveness and its impact on tax revenue (ERIA Discussion Paper Series ERIA-DP-2016-17). Jakarta, Indonesia: Economic Research Institute for ASEAN and East Asia.

Das-Gupta, A., Lahiri, R., & Mookherjee, D. (1995). Income tax compliance in India: An empirical analysis. World Development, 23(12), 2051-2064. https://doi.org/10.1016/0305-750X(95)00098-W

Dom, R. (2017). Semi-autonomous revenue authorities in sub-Saharan Africa: Silver bullet or white elephant? (CREDIT Research Paper no. 17/01). Nottingham, England: Centre for Research in Economic Development and International Trade, University of Nottingham.

Fjeldstad, O-H., Kagoma, C., Mdee, E., Sjursen, I. H., & Somville, V. (2018). The customer is king: Evidence on VAT compliance in Tanzania (ICTD Working Paper 83). Brighton, England: The Institute of Development Studies.

Fukuyama, F. (2012, October 2). The strange absence of the state in political science. The American Interest. http://www.the-american-interest.com/2012/10/02/the-strange-absence-of-the-state-in-political-science

Gallagher, M. (2004). Assessing tax systems using a benchmarking methodology. Washington, D.C.: U.S. Agency for International Development.

Garg, S., Goyal, A., & Pal, R. (2014). Why tax effort falls short of capacity in Indian states: A stochastic frontier approach (Indira Gandhi Institute of Development Research Working Paper WP-2014-032). Mumbai, India: Indira Gandhi Institute of Development Research.

Gaspar, V., Jaramillo, L., & Wingender, P. (2016). Tax capacity and growth: Is there a tipping point? (IMF Working Paper WP/16/234). Washington, D.C.: International Monetary Fund.

Giosi, A., Testarmata, S., Brunelli, S., & Stagliano, B. (2014). The dimensions of fiscal governance as the cornerstone of public finance sustainability: A general framework. Journal of Public Budgeting, Accounting & Financial Management, 26(1), 94-139.

Greene, W. (2005), Fixed and random effects in stochastic frontier models. Journal of Productivity Analysis, 23(1), 7-32. https://doi.org/10.1007/s11123-004-8545-1

Gupta, S., Clements, B., Pivovarsky, A., & Tiongson, E. (2004). Foreign aid and revenue response: Does the composition of aid matter? In S. Gupta, B. Clements, & G. Inchauste (Eds.), Helping countries develop: The role of fiscal policy (pp. 385-406). Washington, D.C.: International Monetary Fund.

Gupta, A. S. (2007). Determinants of tax revenue efforts in developing countries (IMF Working Paper 07/184). Washington, D.C.: International Monetary Fund.

Hanousek, J., & Palda, F. (2004). Quality of government services and the civic duty to pay taxes in the Czech and Slovak Republics, and other transition countries. Kylos, 57(2), 237-252. https://doi.org/10.1111/j.0023-5962.2004.00252.x

International Growth Centre. (2022). Incentives for better tax collection. https://www.theigc.org/impact/innovative-tax-policies/

International Monetary Fund. (2019). Fiscal monitoring: Curbing corruption. Washington, D.C.: International Monetary Fund.

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), 233-238. https://doi.org/10.1016/0304-4076(82)90004-5

Joshi, A., Prichard, W., & Heady, C. (2014), Taxing the informal economy: The current state of knowledge and agendas for future research. Journal of Development Studies, 50(10), 1325-1347. https://doi.org/10.1080/00220388.2014.940910

Junquera-Varela, R. F., Awasthi, R., Balabushko, O., & Nurshaikova, A. (2019). Thinking strategically about revenue administration reform: The creation of integrated, autonomous revenue bodies (Governance Global Practice Discussion Paper No. 4). Washington D.C.: World Bank.

Junquera-Varela, R. F., Verhoeven, M., Shukla, G. P., Haven, B., Awasthi, R., & Moreno-Dodson, B. (2017). Strengthening domestic resource mobilization: Moving from theory to practice in low- and middle-income countries. Directions in development—Public sector governance. Washington D.C.: The World Bank.

Kidd, M., & Crandall, W. (2006). Revenue authorities: Issues and problems in evaluating their success (IMF Working Paper 06/240). Washington D.C.: International Monetary Fund.

Kodila-Tedika, O., & Mutascu, M. (2013). Shadow economy and tax revenue in Africa (MPRA Paper No. 50812). Munich, Germany: University of Munich.

Kumbhakar, S. C. (1990). Production frontiers, panel data, and time-varying technical inefficiency. Journal of Econometrics, 46(1-2), 201-211. https://doi.org/10.1016/0304-4076(90)90055-X

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. (2005). Estimation of growth convergence using a stochastic production frontier approach. Economics Letters, 88(3), 300-305. https://doi.org/10.1016/j.econlet.2005.01.023

Kumbhakar, S. C., Wang, H-J., & Horncastle, A. P. (2015). A practitioner’s guide to stochastic frontier analysis using Stata. New York, NY: Cambridge University Press.

Langford, B., & Ohlenburg, T. (2016). Tax revenue potential and effort: An empirical investigation (IGC Working Paper S-4320-UGA-1). London, England: International Growth Centre.

Lee, Y. H., & Schmidt, P. (1993). A production frontier model with flexible temporal variation in technical efficiency: Techniques and applications. In H. O. Fried, C. A. Knox Lovell, & S. S. Schmidt (Eds.). The measurement of productive efficiency (237-255). New York, NY: Oxford University Press.

Mackenzie, O. K. (2021). Efficiency of tax revenue administration in Africa (Stellenbosch Economic Working Paper WP02/2021). Stellenbosch, South Africa: Department of Economics, University of Stellenbosch.

Mascagni, G., Mengistu, A. T., & Wodleyes, F. B. (2018). Can ICTS increase tax? Experimental evidence from Ethiopia (ICTD Working Paper 82), Brighton, England: International Centre for Tax and Development.

Mascagni, G., Monkam, N., & Nell, C. (2016). Unlocking the potential of administrative data in Africa: Tax compliance and progressivity in Rwanda (ICTD Working Paper 56). Brighton, England: International Centre for Tax and Development.

Mascagni, G., Santoro, F., & Mukama, D. (2019). Teach to comply? Evidence from a taxpayer education programme in Rwanda (ICTD Working Paper 91). Brighton, England: International Centre for Taxation and Development.

Mawejje, J., & Sebudde, R. K. (2019). Tax revenue potential and effort: Worldwide estimates using a new dataset. Economic Analysis and Policy, 63, 119-129. https://doi.org/10.1016/j.eap.2019.05.005

McCluskey, R., & Isingoma, M. N. (2017). ICTD partnerships with African revenue authorities: Collaborating for impactful research (ICTD Summary Brief 8). Brighton, England: International Centre for Taxation and Development.

Medina, L., & Schneider, F. (2018). Shadow economies around the world: What did we learn over the last 20 years? (IMF Working Paper WP/18/17). Washington D.C.: International Monetary Fund.

Microsoft & PricewaterhouseCoopers. (2017). Digital transformation of tax administration. Amsterdam, The Netherlands: Microsoft & PricewaterhouseCoopers.

Mills, L. (2017). K4D helpdesk report: Barriers to improving tax capacity. Brighton, England: Institute of Development Studies.

Moore, M. (2008). Between coercion and contract: Competing narratives on taxation and governance. In D. Bräutigam, O. H. Fjeldstad and M. Moore (Eds.), Taxation and state-building in developing countries (pp. 34-63). Cambridge, England: Cambridge University Press. https://doi.org/10.1017/CBO9780511490897.002

Moore, M. (2014). Revenue reforms and statebuilding in anglophone Africa. World Development, 60, 99-112. https://doi.org/10.1016/j.worlddev.2014.03.020

Morrissey, O., Prichard, W., & Torrance, S. (2014). Aid and taxation: Exploring the relationship using new data (ICTD Working Paper 21). Brighton, England: The International Centre for Tax and Development.

Organisation for Economic Co-operation and Development. (2011). Forum on tax administration: Tax administration in OECD and selected non-OECD countries: Comparative information series (2010). Paris, France: OECD Publishing.

Pukelienė, V., & Kažemekaitytė, A. (2016). Tax behaviour: Assessment of tax compliance in European Union countries. Ekonomika, 95(2), 30-56. https://doi.org/10.15388/Ekon.2016.2.10123

Rasul, I., & Roggery, D. (2013). Management of bureaucrats and public service delivery: Evidence from the Nigerian civil service (IGC Working Paper S-5001-NIG-1). London, England: International Growth Centre.

Ricciuti, R., Savoia, A., & Sen, K. (2016). How do political institutions affect fiscal capacity? Explaining taxation in developing economies (ESID Working Paper No. 59). Manchester, England: Effective States and Inclusive Development Research Centre, The University of Manchester.

Roll, M. (2011). The state that works:“Pockets of effectiveness” as a perspective on stateness in developing countries (Working papers of the Department of Anthropology and African Studies of the Johannes Gutenberg University, No. 128). Mainz, Germany: Johannes Gutenberg University.

Ross, M. (2004). Does taxation lead to representation? British Journal of Political Science, 34(2), 229-24. https://doi.org/10.1017/S0007123404000031

Savić, G., Dragojlović, G., Vujošević, M., Arsić, M., & Martić, M. (2015). Impact of the efficiency of the tax administration on tax evasion. Economic Research-Ekonomska Istraživanja, 28(1), 1138-1148. https://doi.org/10.1080/1331677X.2015.1100838

Schmidt, P. (2011). One-step and two-step estimation in SFA models. Journal of Productivity Analysis, 36(2), 201-203. https://doi.org/10.1007/s11123-011-0228-0

Schmidt, P., & Sickles, R. C. (1984). Production frontiers and panel data. Journal of Business and Economic Statistics, 2(2), 367-374. https://doi.org/10.2307/1391278

Schneider, F., Buehn, A., & Montenegro, C. E. (2010). Shadow economies all over the world: New estimates for 162 countries from 1999 to 2007 (Policy Research Working Paper 5356).Washington D.C.: World Bank.

Sicat, G. P., & Virmani, A. (1988). Personal income taxes in developing countries. The World Bank Economic Review, 2(1), 123-128. https://doi.org/10.1093/wber/2.1.123

Taliercio Jr., R. (2004). Administrative reform as credible commitment: The impact of autonomy on revenue authority performance in Latin America. World Development, 32(2), 212-232. https://doi.org/10.1016/j.worlddev.2003.08.008

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

Tanzi, V., & Zee, H. H. (2000), Tax policy for emerging markets: Developing countries, National Tax Journal, 53(2), 299-322. https://doi.org/10.17310/ntj.2000.2.07

Thomas, A. H., & Trevino, J. P. (2013). Resource dependence and fiscal effort in Sub-Saharan Africa (IMF Working Paper, WP/13/188). Washington D.C.: International Monetary Fund.

Timmons, J. F. (2005). The fiscal contract: States, taxes, and public services. World Politics, 57(4), 530-567. https://doi.org/10.1353/wp.2006.0015

UNU-WIDER (2020). Government revenue dataset. Helsinki: UNU-WIDER. https://doi.org/10.35188/UNU-WIDER/GRD-2022

The World Bank Group. (2022a). Databank: World development indicators. https://databank.worldbank.org/source/world-development-indicators

The World Bank Group. (2022b). Databank: Worldwide governance indicators. https://databank.worldbank.org/source/worldwide-governance-indicators

The World Bank Group. (2022c). World Bank open data. https://data.worldbank.org/

Yogo, U. T., & Ngo Njib, M. M. (2016). Political competition and tax revenues in developing countries (WIDER Working Paper 2016/116). Helsinki, Finland: The University Nations University World Institute for Development Economics Research.


Refbacks

  • There are currently no refbacks.


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