Revenue Potential, Tax Space, and Tax Gap : A Comparative Analysis

This paper contributes to the empirical literature on the key determinants of the revenue generating potential in 61 countries. The paper uses a broad set of data and econometric methods to conduct analyses that are of relevance to revenue potential. Earlier studies have not distinguished between the revenue potential based on economic fundamentals of countries and that based on what the legal framework prescribes. This study uses a dual approach to revenue potential to examine the issue. Two sets of variables are used, one related to the intrinsic economic structure and strength of countries that affect revenue potential and the other related to tax policy variables. Accordingly the analysis finds two sets of revenue potentials: one can be termed "revenue potential (economic)," and the other "revenue potential (legal)." The difference between the revenue potential (legal) and the actual revenue collected is commonly understood as the "tax gap." The difference between the revenue potential (economic) and the actual revenue collected can be termed the "tax space," the amount of revenue that a country can afford to collect, given its economic strength, not based on what the parliament has mandated. The results show that legally mandated revenue potentials in countries in Eastern Europe and Central Asia are often higher than the revenue potential based on what the country's economic fundamentals can afford. The paper also makes use of a tax effort index and finds that although many countries are performing close to the revenue potential (economic), it is more difficult to match up to the revenue potential (legal). The relationship between the revenue potential and the shadow economy, value added tax productivity, and some other determinants are examined to test whether some countries are taxing beyond their means.

Bibliographic Details

Main Authors:	Khwaja, Munawer Sultan, Iyer, Indira
Language:	English en_US
Published:	World Bank, Washington, DC 2014-05
Subjects:	BANK POLICY, BOND, CAPITAL EXPENDITURES, CASH TRANSFERS, CD, CHECKS, CORPORATE INCOME TAX, CORPORATE TAX, CORPORATE TAX RATE, COUNTRY FIXED EFFECT, DEBT, DEVELOPING COUNTRIES, ECONOMIC DEVELOPMENT, ECONOMIC STRENGTH, ECONOMIC STRUCTURE, EFFECTIVE TAX RATES, EXPENDITURE, EXPENDITURES, EXPORTERS, EXPORTS, FEDERAL RESERVE, FEDERAL RESERVE SYSTEM, FISCAL ISSUES, FISCAL POLICY, FISCAL SUSTAINABILITY, FIXED EFFECT MODEL, FIXED EFFECTS, FLAT TAX, FLAT TAXES, FOREIGN TRADE, FORMAL SECTOR, GLOBAL ECONOMY, GOOD GOVERNANCE, GOVERNANCE INDICATORS, GOVERNMENT SPENDING, GROWTH RATE, HIGH TAX BURDENS, INCOME TAX, INCOMES, INSTRUMENT, INTERNATIONAL BANK, INTERNATIONAL DEVELOPMENT, INTERNATIONAL FINANCE, JOB CREATION, LABOR MARKET, LEGAL FRAMEWORK, LEVY, MARGINAL TAX RATES, MARKET STANDARDS, MONETARY FUND, OPTIMAL TAXATION, OUTPUT, PAYROLL TAXES, PERSONAL INCOME, PERSONAL INCOME TAX, POLITICAL STABILITY, POSITIVE COEFFICIENT, PUBLIC EXPENDITURE, PUBLIC INVESTMENT, PUBLIC SPENDING, REGULATORY FRAMEWORK, RETURN, REVENUE PRODUCTIVITY, SMALL BUSINESS, SOCIAL SECURITY TAXES, STRUCTURAL BREAKS, TAX, TAX ADMINISTRATION, TAX AUTHORITIES, TAX BASE, TAX BURDENS, TAX COLLECTION, TAX COLLECTIONS, TAX COMPLIANCE, TAX EVASION, TAX LEGISLATION, TAX POLICIES, TAX POLICY, TAX RATE, TAX RATIO, TAX REFORM, TAX REFORMS, TAX REGIME, TAX REGIMES, TAX RETURNS, TAX REVENUE, TAX REVENUES, TAX STRUCTURE, TAX SYSTEM, TAX SYSTEMS, TAX WEDGE, TAXATION, TRADE SECTOR, TRANSITION COUNTRIES, TRANSITION ECONOMIES, TRANSPARENCY, TRUST FUND, TURNOVER, TURNOVER TAXES, USE TAX, VALUE ADDED TAX, VALUE ADDED TAXES, WITHHOLDING TAX, WORLD DEVELOPMENT INDICATORS,
Online Access:	http://documents.worldbank.org/curated/en/2014/05/19535654/revenue-potential-tax-space-tax-gap-comparative-analysis https://hdl.handle.net/10986/18806
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