Assessing Overall Fiscal Effort in Eca, 1995-2004

Abstract

This paper uses the method of measuring tax capacity and tax effort to analyze how well ECA countries are utilizing their tax capacities, relative to the average performance across countries. Among the variables that have been identified to be determinants of tax shares are: (i) tax evasion, and (ii) control of corruption, although they are found to be less important than conventional factors. The tax effort indices obtained show that generally the ECA countries are making better use of their tax bases to increase revenue than countries from Latin America or East Asia. However, there are substantial variations in tax effort among ECA countries and several countries have the potential to increase revenues via making better use of their tax bases (increased tax effort), and improving the quality of their institutions. Our results can be used to provide guidance on the proper mix of fiscal policy in the event of budgetary imbalance or growing debt burdens.