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The capacity of governments to raise taxes

Oguzhan Akgun, David Bartolini () and Boris Cournède ()
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Oguzhan Akgun: OECD

No 1407, OECD Economics Department Working Papers from OECD Publishing

Abstract: This paper investigates the factors that shape governments’ capacity to collect revenue. To do so, it analyses how tax revenue responds to tax rates using evidence from a panel of 34 OECD countries over 1978-2014. The estimations show that the response of revenue to rates weakens as rates become higher, confirming the existence of a hump-shaped relationship between tax revenue and rates for corporate income taxation and providing a new contribution by analysing value-added taxation. Importantly, the estimated responses of revenue to tax rates vary, in some cases very strongly from an economic perspective, depending on country-specific policies and framework conditions. In particular, the corporate income tax revenue-generating potential of hiking the effective rate shrinks much more quickly in more open economies than in more closed ones. Tax revenue is found to be more responsive to tax increases in countries where the tax authorities have more resources. The investigations also cover personal income taxation. They point to diminishing revenue returns of increasing the effective marginal tax rates that apply at substantially above-average income levels.

Keywords: country-specific circumstances; effective marginal tax rate; framework conditions; interactions; Laffer curve; personal income tax; social security contributions; value added tax (search for similar items in EconPapers)
JEL-codes: H20 H24 H26 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
Date: 2017-09-11
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Persistent link: https://EconPapers.repec.org/RePEc:oec:ecoaaa:1407-en

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