Countries' Tax Effort: Disentangling the Frontier Tax Gap

Using Stochastic Frontier Analysis, this paper updates, for 123 countries, the estimates of tax capacity—defined as the maximum level of revenue a country can feasibly achieve— and tax effort —measured as the ratio of actual tax revenue to tax capacity. It also introduces two novel models that decompose the frontier tax gap —the difference between actual tax revenues and tax capacity— into tax policy and tax administration components. Assessing tax effort is essential before introducing new taxes or raising existing ones, as it helps determine the scope for additional revenue mobilization within the current system. The frontier tax gap decomposition thus provides a rigorous diagnostic framework for identifying where reform efforts should be initiated and where they should be most effectively targeted.