A more accurate measurement of tax effort

Sangheon Kim

Applied Economics Letters, 2007, vol. 14, issue 7, 539-543

Abstract: Even though it is commonplace in many countries for federal governments to give fiscal support to local governments, this may work as a deterrent in providing incentives to local governments to increase their own revenue. To address this problem of moral hazard, various techniques of measuring the local governments' tax effort have been suggested in the literature. However, all of these techniques share a drawback: 'biasedness'. To solve this problem, this article presents an unbiased estimator, which is the Kalman filter estimator. A Monte Carlo simulation shows evidence that the Kalman filter estimator is more accurate than other methods suggested in the literature.

Date: 2007
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DOI: 10.1080/13504850500425345

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