An Assessment of tax revenue performance using tax capacity and tax effort

Abstract

The paper assesses tax revenue performance in the Southern African Development Community by empirically estimating the member countries’ tax capacity and tax effort to determine member states that are near or far from their tax capacity using the standard regression approach. Tax revenue mobilization is of paramount importance for a country’s development and subsequent regional socioeconomic development; therefore, it is imperative to heighten the understanding of whether the current tax systems in the region provide enough tax revenue to meet public expenditure needs. Literature suggests that several economic, demographic, and institutional aspects restrict tax collections. In this regard, the study finds that the level of economic growth, financial deepening, and trade openness positively and significantly influence tax revenue mobilization. On the other side, urbanization, the share of agriculture in GDP, and the size of the shadow economy are negatively and significantly impacting on tax capacity. More so, the low levels of governance quality are having detrimental effects on tax collection and the effect is larger compared to other determinants. Overall low tax collection in the region is attributable to both low tax capacity and administrative inefficiencies. It is also established in the study that the impact of changes in tax structure and systems and external shocks should not be overlooked. The ranking of member countries into different groups of performers has assisted in providing broad guidance for tax policy design and reforms. However, the cross-cutting issue is the need for improving governance to build effective and efficient systems.