Tax Effort in Eurozone Countries After the Outbreak of the Global Economic Crisis

The purpose of this article is to assess the tax effort undertaken by Eurozone countries, during the decade that followed the outbreak of the financial and economic crisis. Tax effort is measured by relating actual tax collections to some indicator of taxable capacity. Some countries are more favorably placed to levy taxes and can be said to have a greater taxable capacity than others. Regression analysis is used on cross-section data, to quantify the influence of Eurozone countries’ specific economic and institutional features on the tax ratio. With the resulting estimates of the coefficients, an average tax ratio is estimated for each country. Then, the tax effort for each country is calculated by the percentage difference of the actual tax ratio and its estimate and countries are ranked accordingly. Our findings confirm previous results that Eurozone countries’ tax effort index is around one, suggesting that they adequately use their tax bases to raise tax revenues. However, there are some Eurozone countries which undertake greater tax effort while in some other Eurozone countries there is room for raising more tax revenues. The current article contributes to the existing literature of assessing similarities within the euro-area regarding the tax policy adopted, after the outbreak of the 2008 economic crisis. Most of the literature focuses on comparing tax revenues as a percentage of GDP. However, this tax ratio may give a distorted picture, since economic developments in different countries, especially after the outbreak of the crisis, considerably altered the effectiveness in revenue mobilization. The current article goes beyond this comparison, assesses the tax capacity and the tax effort undertaken in the different Eurozone countries and ranks them accordingly. It contributes to the existing tax effort literature, by introducing in the analysis wealth instead of GDP, as a measure of economic activity and wellbeing.