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Applied mathematics in Engineering, Management and Technology 2 (2) 2014:378-384
www.amiemt-journal.com
Estimation of Potential Taxable Capacity of the Developed OilExporter Countries
Nasser Ali Yadollahzadeh Tabari *1, Mohadese Soltantooyeh 2
1,2
Department of Economics, Babol Branch, Islamic Azad University, Babol, Iran.
Abstract
Tax is an important income source for the governments, so investigating a way to
increase it is very important and to do so an accurate estimate of the income
capacity and the existing sources is necessary. The most proper criterion to
calculate and estimate its capacity, which can be potentially taxed, is the tax basis
of different economic sectors. In this research we have estimated the tax capacity of
the developed oil-exporter countries by using combined data for 11 countries in two
periods of (2005-2007) and (2008-2010). The results of the estimated model
showed no gap or little gap between the potential tax capacity and the realized tax
proceeds. Also the results for investigating the tax efforts of the selected countries
in the time period of post-crisis and within crisis shows that despite the crisis there
is a decrease in the countries tax efforts compared to the pre-war period.
Keywords: tax; tax potential economic capacity; tax rate; tax effort; developed countries
1.Introduction
One of the concerns of the governments and economic systems in the world is tax system efficiency and
determining tax rates for different classes of society so that with having the maximum tax capacity, it can have
the highest income for the governments. The tax capacity is one of the concepts which despite its importance,
has little been dealt with in short-term and long-term programming and in executive organization and method
reforms. The purpose of taxation is basically to equip governmental sources, making economic policies and
help improve the process of income distribution in society. To know and estimate the society's real potential to
pay taxes and factors affecting it, the issue of tax capacity is discussed. Considering the importance the tax
incomes have in covering government expenses, the tax capacity can have a considerable role in economic
policy making.
The tax capacity is actually the volume of tax the society is capable of paying (or is able to pay). Also tax
capacity reveals that, first of all, how much a country or region has exerted efforts to equip tax sources and
second, how much it can increase these sources.
A short look at the countries tax system performance reveals that despite the measures taken to reform tax
system in its various aspects, reforming the rates and tax exemptions and extensive bureaucratic reforms in
detection processes to collect taxes, the changes in the ratio of tax to GDP which is used as a worldwide
acceptable index to assess the countries tax system performance, have been too slow and little in some
countries.
In spite of the economic crisis in recent years and its effects on oil price fluctuations, investigating the tax
capacity of the developed oil-exporter countries is considered. In this research we will investigate the effects of
the 2008 crisis and its aftershocks on the financial capacity of the developed countries. To do so, we will take a
look at the selected countries financial capacity in the crisis period and the pre-crisis period. And it is expected
that with the crisis and therefore the oil price increase, the tax efforts ebb in the countries under investigation.
Also since not all developed countries have similar tax capacities and equal tax efforts, we investigated the tax
capacity and tax efforts of 11 developed oil-exporter countries.
2.Literature review
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The economic theories and studies done by economists reflect different attitudes toward tax capacity and factors
influencing it.
2.1 Definitions for tax capacity
there are various definitions for the tax capacity, but we can generally say that the tax capacity is actually the
volume of tax the society is capable of paying and this capability relies on the incomes, consumptions and
investigation on the one hand and on long-term goals and short-term and medium-term programs available to
investigate on texts like the constitution, regular laws and executive processes, on the other hand.
The tax capacity offers necessary information about the capacity of a country or a region in equipping tax
sources to fulfill financial problems and execute economic policies and also shows ,first, how much a country
has tried to equip tax sources and ,second, how much it expects these sources to increase.
The tax capacity is necessarily determined through considering the optimal tax, hence the optimal tax and the
tax capacity are briefly used interchangeably. Therefore a tax system is described as efficient when the society
has reached its tax capacity level and then the estimated tax capacity is compared to the collected tax.
2.2 Types of tax capacities
1. Tax capacity of national income: is the financial potentials of the national income to make tax incomes
within the existing laws.
2. Tax capacity of national capital: this capacity is actually the government's tax incomes through national
capitals and is complementary to the Tax capacity of national income, like tax on heritage.
3. Tax capacity of the final return of capital: according to this definition in every economic sector and subsector
and based on the amount of return in similar governmental activities in different sectors and on the type of
situation where its possible to optimize the efficiency of all society, the return of the capital must be
investigated.
3.Research methodology
Tax performance is comprised of two different and separate criteria. One is the tax capacity which is a criterion
for the government's capability of making income and the other is the tax effort which shows the domain where
the government has been able to identify the existing tax bases and make use of its tax capacity. These two
criterions together show a picture of the potential possibility of extra taxation.
Economists usually use the ratio of tax to GDP to assess countries tax performance. Moreover, the abovementioned index is used to compare countries tax performances. Utilizing such a ratio is a proper way to
compare tax performances or processes of countries with similar economic and income structure. Simplicity
and giving a general and exhaustive view of the international processes of taxation are of the advantages of this
method. Nevertheless it should be noted that using this method to investigate and compare the effectiveness of
taxation policies in different countries with different income groups may lead to an unreal picture of the truth.
And the reason for this is attributed to differences in economic structures, institutional arrangements and
population processes.
Tax efforts reflect the domain or limits within which a country or a province makes use of its tax capacity. Tax
efforts are influenced by tax rates levels, granted exemptions, efforts toward law enforcement or executive
operations of the bureau of levy, etc. The index of tax efforts determines the gap between levying tax in a
country or a province and the tax capacity
Of the some country or region' Therefore, the emphasis of the point that different countries may have different
levels of tax efforts is on the fact that the tax collected in a country and the capability of collecting it or
increasing the proceeds are two different concepts.
According to this index, “tax efforts” is gained through dividing the actual tax by the predicted tax rate:
T ax Effort =
(T/GDP) actual
(T/GDP) predicted
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N. Yadollahzadeh and M. Soltantooyeh
Opposite the comparison of the simple ratio, the index of tax efforts actually offers the possibility to evaluate
the effectiveness of the policies and programs of a country in increasing tax incomes, considering the
differences among the regions and countries based on tax capacity.
The method above is the one Chelliah [1] mentions as the criterion for the statics of evaluating tax performance,
because the method measures the potential tax capacity or capability at a point of time. He believes that the tax
effort must be calculated dynamically to give the possibility of comparing tax ratio changes during time, so that
if a country or a region had little tax effort at a specific point of time, it can be judged whether or not there have
been any efforts to increase the tax incomes during time. He recognizes tax effort as a process which gets
various forms such as reforming existing taxes, improving tax bureaucratic structure and introducing new taxes,
and all these need time to program, legislate and execute.
4.Experimental studies about the potential economic capacity of tax
The optimal level for tax income and its role in GDP of a country is both an ideological and technical issue.
Governments in different countries have different perspectives toward “the amount of tax without being
jeopardized by long-term economic growth”. In fact there are limits and maximums for tax income. Weiss
believes that despite all the limitations, there is one important tradition in Economy, based on which the ratio of
tax to GDP is considered an important element in financial policy that can influence development strategy. The
issue of the potential tax sources the government can receive has brought up the idea and concept of “tax
capacity”. Tax capacity refers to people's capability of paying taxes and the government's capability of
collecting them. In this section the most important researches and studies conducted within the field of the
potential sources of tax incomes and tax capacity in different countries are analyzed.
There have been researches about tax capacity in different countries, some are mentioned bellow.
In his study Chelliah [1] investigates the tax effort and tax capacity in 50 different developing countries within
the time period of 1953-1968. In the study the functional relationships between the tax ratio and independent
variables are presented in a linear form and are estimated through the method of the least ordinary squares in
the sectional method.
In his study Piancastelle [6] has calculated the tax effort of 75 countries through the method of the least
ordinary squares during 1985-95. Tax effort for each country has been calculated through the ratio of collected
tax to estimated tax and Castelle put these countries into 3 groups: group one, countries with low income(31
countries); group two, countries with average income(20 countries); group three, countries with high income(24
countries). After estimating the model he concluded that most countries of high income have the tax effort of
higher than one, among the countries of average income only six had the tax effort of higher than one and most
countries of low income have the tax effort of higher than one. Countries of low income supply most of the
financial sources of the ruling government from tax incomes.
In his study Eltony [3] suggests that most Arab countries have problems supplying enough income for their
public expenses and may face budget deficit. In his study to investigate the share of tax income and to calculate
the tax effort index, he investigated the tax effort in 16 Arab countries using the section and time-order statistics
and information by the estimation of the least ordinary squares model during the years of 1994-2000. The
results for the estimation of econometrics model show that factors such as income per capita, the share of
agriculture in GDP, the share of mining in GDP, have been the most important factors determining the ratio of
tax to GDP in Arabic countries. Moreover the individual characteristics of each country such as the type of the
political system, people's attitude toward the government, the quality of the tax administration and other
administration branches of the government have played roles in determining the Arabic countries tax efforts.
In his study, Sobarzo [7] assesses the tax effort and tax capacity in Mexico and suggests that to reach a proper
level of tax effort, attention should be directed to tax decentralization, and he says that Mexico has had a
centralized administration. He used the representative tax system (RTS) and concluded that the tax collected by
different sectors is almost close to the national average, while the federal tax is under the national average i.e.
The sectors have a better performance than the federal government in collecting taxes.
Using time section data with the average amount for the years 1990-99, Bird and et al. investigate the role of
social factors in decrease or increase of tax incomes. They categorize the factors affecting the tax capacity into
three groups: 1-Development, 2-The degree of the economy's openness, 3-Economy structure. The two general
model and developed model have been used in this research. In the general model, the variables of per capita
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GDP, population growth rate, the ratio of export plus import to GDP and the share of the agriculture sector in
GDP have been used. In the developed model the variables of social factors and the size of the shadow
economy have been inserted. The results suggest that there being a legal and responsible government is a
requisite of better levels of tax effort in developing countries and social factors are a key to increasing tax
effort, hence not only the factors of the supply part but the factors of the demand part are also important.
Davoodi and Grigorian [2] have done a sectional research to investigate the factors of this country's (Armenia)
toughness in collecting tax. In this research they have used the figures and data from IMF database about 41
countries in the time period of 1990-2004. Using the sectional data, they have also estimated the model by the
method of the least ordinary squares and concluded that Armenia's tax ratio has a direct relationship with the
quality of the social factors and an inverse relationship with the shadow economy and that improving the ruling
institution in this country will greatly contribute to their tax performance.
Using 2SLS (two-stage least squares) model, Le et al. [5] analyze the tax capacity and tax effort among 110
developed and developing countries. In this article, to predict the tax capacity, the ratio of tax income to GDP,
demographic and institutional characteristics of macro economy have been estimated. Tax effort has been
defined as the index of the share ratio of the total domestic actual tax and the predicted tax capacity. Using the
criterion of tax effort and the total actual tax has let them to divide countries into four groups: low total tax, low
tax effort; high total tax, high tax effort; low total tax, high tax effort; high total tax, low tax effort. Analysis
according to this categorization based on the criterion of the universal average of tax collection and the index of
tax effort gives a guideline for countries tax reform in different levels of tax collection and tax effort.
5.The stipulation of the econometrics model to estimate tax economic capacity
From Chelliah [1] point of view, evaluating the actual and potential tax performance of a country is a matter of
judgment and the country's development stage its economic structure, national customs and some special
situations and requirements need to be considered.
Considering previous studies, in this study we have used the below model to investigate the factors affecting tax
capacity in selected countries in two 3- year periods of (2005-2007) and (2008-2010). The mentioned model
comes from the recent study of The World Bank (2008) and the study of Gupta [4] which is used with little
changes. To calculate tax capacity, the regression model is explained as below:
LTGDPt = b 0 + b1 LVAgri it + b 2 LVIndust it + b 3 LManufactu rit + b 4 LServises it + b 5 LRGDPPC it + b 6 LUrban it + b 7 Inf it + e t
LTGDP: logarithm of the ratio of tax revenue to GDP
LVAgri: logarithm of the value added share of agriculture in GDP
LVIndust: logarithm of the value added of the industrial sector's share of GDP
LManufactur: logarithm of the value added of the mining sector's share of GDP
LServises: logarithm of the value added in the services sector's share of GDP
LRGDPPC: logarithm of real GDP per capital
LUrban: logarithm of the ratio of urban population to total population
Inf: inflation, and i is represented countries and t represents time.
The statistical information about macroeconomic indicators are taken from WDI. In this study the selected
countries have been investigated according to the index of development and the volume of oil export. So the
countries are developed ones with a high index of oil export. They include Belgium, Canada, France, Italy,
South Korea, Netherland, Norway, Russia, Singapore, England and America.
6.Estimating the model and its results
In experimental and comparative international studies, the performance of the countries tax system is estimated
by using the combination of time series and sectional series about the factors affecting the countries tax
capacity and using the method of consolidated regression estimate. In other words, studies about calculating the
potential economic tax capacity in a specific country make sense only in a comparative study between
countries.
Now we will estimate the mentioned regression model. Since data used in this model are a combination of
Sectional and time - series data, to control the problem of variance anisotropy and autocorrelation while using
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the panel data, we have used the method of the least generalized squares within the frame of Period Seemingly
Unrelated Regressions (PSUR). Considering the fact that according to the given definition, the tax capacity is
the most tax collectable in long term according to the level of income distribution, its combination and each
country's existing laws, the tax capacity explains the long-term balance relationship between tax ratio and
factors affecting it. Also, in this model all sections have been given equal weight and it is assumed that there are
not any differences among sections which are caused as a result of the specific features of each region.
In estimating the model, first, we use Chaw and Hausman detection test to specify an appropriate estimation
method for the model. In the calculations done by eviews7, the test results are shown to investigate the fixed
and random effects.
Table 1. The estimated results of fixed effects tests (2005-2007)
Effect Test
Statistic
Prob
Cross-section F
664.0783
0.0000
Cross-section Chi-square
201.1413
0.0000
Table 2. The estimated results of Hausman test (2005-2007)
Test Summary
Chi-Sq. Statistic
Prob
Cross-section random
16.7946
0.0188
The P-value of Chaw statistic is zero, so the method of estimating integrated data is rejected. Also, the P-value
of Hausman statistic is 0.0188 according to which the method of estimating fixed effects for the investigated
model in the period of 2005-2007 is a better option.
Table 3. The estimated results tax capacity (2007-2005)
Variables
Coefficients
t-statistics
Prob.
C
-10.3467
-4.6610
0.0003
LVAgri
-0.2412
-4.3071
0.0006
LVIndust
0.0893
8.1410
0.0000
LManufactur
0.2928
5.0913
0.0001
LServises
0.0820
0.4048
0.6913
LRGDPPC
0.1936
3.0817
0.0076
LUrban
2.3290
4.5999
0.0003
Inf
0.0122
9.0408
0.0000
R2
0.9997
F-Statistic
3365.206
Prob(F-Statistic)
0.0000
The results of estimation in the period of 2005-2007 show that the relation among the logarithm of per capita
income, logarithm of the ratio of the mining sectors added value to GDP, logarithm of the ratio of the industrial
sectors added value to GDP, the logarithm of the ratio of urban population to the total population and the tax
ratio in developing oil-exporter countries is positive and Significant. Also the relation between inflation and tax
ratio in the investigated countries is positive and Significance because inflation is moderate. Moreover, the
relation between the logarithm of the ratio of the agricultural sectors added value to GDP and tax ratio is
negative and Significant and the reason of this negative mark can be the subsidy the countries allot to the
agricultural sector and that this sectors enjoys tax exemption more.
Table 4. The estimated results of fixed effects tests (2008-2010)
Effect Test
Statistic
Prob
Cross-section F
159.5264
0.0000
Cross-section Chi-square
154.3114
0.0000
Table 5. The estimated results of the random effects test (Hausman test) period (2008-2010)
Test Summary
Chi-Sq. Statistic
Prob
Cross-section random
3.7330
0.8100
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Applied mathematics in Engineering, Management and Technology 2 (2) 2014
N. Yadollahzadeh and M. Soltantooyeh
Table 6. The estimated results tax capacity (2008-2010)
Variables
Coefficients
t-statistics
Prob.
C
-10.4796
-1.0706
0.2946
LVAgri
-0.2393
-2.0792
0.0480
LVIndust
1.0563
1.9708
0.0588
LManufactur
-0.1380
-0.6225
0.5392
LServises
0.3738
2.2179
0.0346
LRGDPPC
0.0980
1.9299
0.0955
LUrban
1.2388
0.8032
0.4294
Inf
0.0109
2.7671
0.0105
R2
0.409
F-Statistic
2.247
Prob(F-Statistic)
0.0444
The results of estimation in the period of 2008-2010 show that the relation among the logarithm of per capita
income, logarithm of the ratio of the mining sectors added value to GDP, logarithm of the ratio of the industrial
sectors added value to GDP, logarithm of the ratio of the services sectors added value to GDP; the logarithm of
the ratio of urban population to the total population and the tax ratio in developing oil-exporter countries is
positive and Significant(Logarithm of income tax with a confidence level of 90% is positive and significant).
Also the relation between inflation and tax ratio in the investigated countries is positive and Significance
because inflation is moderate and inflation is GDP growth stimulating and growth in the various sectors.
Moreover, the relation between the logarithm of the ratio of the agricultural sectors added value to GDP and tax
ratio is negative and Significant and the reason of this negative mark can be the subsidy the countries allot to
the agricultural sector and that this sectors enjoys tax exemption more.
Now using the gained coefficients, we calculate tax capacity in the mentioned period.
Table 7. Results the tax effort for selected countries during (2005-2010)
tax effort (2005tax effort (2008Row
Country
2007)
2010)
Belgium
1.025589
1.009365
1
Canada
1.030866
0.988925
2
France
1.066159
1.060606
3
Italy
1.045281
1.076629
4
South Korea
1.053943
1.038501
5
Netherlands
1.023413
1.039865
6
Norway
1.0137
0.991965
7
Russia
1.167954
1.095728
8
Singapore
1.035579
1.042102
9
The U.K
1.025166
1.027605
10
The U.S
1.021919
1.01575
11
7.Conclusion
Since the results of the experimental findings about tax ratio and factors affecting it in the international level are
different due to the sensitivity of these studies to the countries under study and the investigation time period, the
index of tax effort should not be used mechanically in interpreting how much tax can be increased, therefore,
tax effort cannot be deemed as a substitute for the exhaustive study of taxation in a direct relationship with
government expenses. Nevertheless, the research results show a high potential tax capacity for the developed
oil-exporter countries and as it was shown the tax effort is high in those countries and is close to one. According
to the results in table 7, it is expectedly seen that despite the crisis in the time period of (2008-2010), tax effort
has decreased in the mentioned period and almost all countries show similar results (only Italy and Netherland
show increased tax efforts in that period and the reason is that these countries budgets are less affected by the
oil price fluctuations). Therefore, it can be said that developed oil-exporting countries all have high tax efforts
and considering the crisis the three-year period before that, the tax effort has ebbed.
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References
Chelliah, R.J. (1971). Trand in taxation in developing Countries. International Monetary Fund, 18: 254-331.
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Low Tax Collection. Working Paper.
Eltony, M.N (2002). The Determinants of Tax Effort in Arab Countries. Working Paper.
Gupta S.A. (2007). Determinants of Tax Revenue Efforts in Developing Countries. Working Paper.
Le, T.M., Moreno-Dodson, B., and Bayraktar, N. (2012). Tax capacity and tax effort: extended cross-country analysis from
1994 to 2009. Working Paper.
Piancastelle, M. (2001). Measuring the Tax Effort of Developed and Developing Countries. Working Paper.
Sobarzo, H. (2004). Tax Effort and Tax Potential of State Governments in Mexico: A Representative Tax System.
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