Different modelling approaches of tax revenue performance: The case of Baltic countries

Abstract

Tax revenue performance represents one of the most essential issues to every government when creating and profiling fiscal policy according to the macroeconomic framework of each country. In particular, this issue comes to the fore in extraordinary circumstances and unstable trends when governments are exposed to greater costs of financing budget deficits and public debts. Tax revenue mobilization shows the government’s ability to collect sufficient revenue to finance government expenditures, as well as cover public needs. By using static and dynamic panel approaches, this research investigates the effect of tax revenue performance in Baltic countries (Estonia, Latvia and Lithuania) for the period 1995–2020. The main objective of this paper is to identify which determinants are crucial for improving tax revenue performance in the Baltic region. Namely, this research identifies how the main macroeconomic determinants affect the tax revenue performance in Baltic countries, which enables these economies to adjust to their favorable and unfavorable effects from the aspect of tax revenue mobilization. The empirical results show that gross domestic product per capita, industry value added, trade, and government expenditures have positive effects on tax revenue performance, while inflation, gross government debt, and exchange rate volatility negatively affect the tax revenue performance in these economies. Furthermore, the joining of Baltic countries to the European Union upgraded the tax revenue performance of this region in the short-run and long-run. Precisely, Baltic countries should focus on a higher level of economic growth, greater industry share and trade of GDP, as well as lower inflation rate, lesser exchange rate volatility, and smaller government gross debt.