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Disentangling Tax Capacity and Effort

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  • Andrey Timofeev

    (International Center for Public Policy, Georgia State University)

Abstract

For over 50 years, the IMF and other international organizations have compared tax performance across countries. Over this time, both data availability and sophistication of statistical methods have improved considerably. However, these new tools cannot eliminate the fundamental problem of imperfect information, as the observed tax outcome is a joint product of unobservable tax effort and tax capacity. This paper aims to serve as a refresher on the purposes and assumptions underlying this kind of empirical study and to reassess the best technical solutions of currently available modeling approaches, given the improvements in the availability of longitudinal data and advances in dynamic panel analysis made over these 50 years. Using an error-correction model in this paper, I attempt to disentangle the long-run relationship between tax capacity and economic development from short-run adjustments in response to economic cycles and other transient shocks.

Suggested Citation

  • Andrey Timofeev, 2023. "Disentangling Tax Capacity and Effort," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper2321, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    • Handle: RePEc:ays:ispwps:paper2321
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    File URL: https://icepp.gsu.edu/files/2023/12/paper2321.pdf
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