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Effective versus Statutory Taxation: Measuring Effective Tax Administration in Transition Economies

  • Mark Schaffer
  • Gerard Turley

Wide differences between effective or realised average tax rates and tax yields that would result if statutory tax rates were strictly applied indicate tax compliance and collection problems. Due to the greater politicisation of tax systems in transition economies (TEs), we would expect the shortfalls in effective tax yields for TEs to be larger than a benchmark for the mature market economies where tax systems are well established, the administrative capacity is stronger and tax arrears are tolerated less frequently. The methodology involves calculating an effective/statutory (E/S) tax ratio. Initial results indicate that the leading TEs have E/S ratios similar to the EU average. We find a positive correlation between progress in transition and effective tax administration, as measured by our E/S ratio. For slow reformers, the effectiveness of tax collection appears to vary with the extent of state control. Those TEs that have maintained the apparatus of the state have done well in tax collection compared to those countries where there is evidence of state decay. This raises a number of broad policy issues relating to the speed of transition, the interaction of politics and economic reforms, the capacity of the state to govern and the need for market institutions to develop.

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Paper provided by Centre for Economic Reform and Transformation, Heriot Watt University in its series CERT Discussion Papers with number 0008.

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Date of creation: 2000
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Handle: RePEc:hwe:certdp:0008
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  1. Enrique G. Mendoza & Assaf Razin & Linda L. Tesar, 1994. "Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption," NBER Working Papers 4864, National Bureau of Economic Research, Inc.
  2. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  3. Peter Murrell, 1996. "How Far Has the Transition Progressed?," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 25-44, Spring.
  4. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
  5. Don Fullerton, 1983. "Which Effective Tax Rate?," NBER Working Papers 1123, National Bureau of Economic Research, Inc.
  6. Burgess, Robin & Stern, Nicholas, 1993. "Taxation and Development," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 762-830, June.
  7. D. Reisman, 1999. "Russia's Tax Crisis: Explaining Falling Revenues in a Transitional Economy," Economics and Politics, Wiley Blackwell, vol. 11(2), pages 145-169, 07.
  8. Liam P. Ebrill, 1999. "Tax Reform in the Baltics, Russia, and Other Countries of the Former Soviet Union," IMF Occasional Papers 182, International Monetary Fund.
  9. Eric Friedman & Simon Johnson & Daniel Kaufmann & Pablo Zoido-Lobaton, 1999. "Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69," Departmental Working Papers 199921, Rutgers University, Department of Economics.
  10. Sergei V. Alexashenko & Augusto López-Claros, 1998. "Fiscal Policy: Issues During the Transition in Russia," IMF Occasional Papers 155, International Monetary Fund.
  11. Simon Johnson & Daniel Kaufman & Andrei Shleifer, 1997. "The Unofficial Economy in Transition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 159-240.
  12. Newbery, David M G, 1995. "Tax and Benefit Reform in Central and Eastern Europe," CEPR Discussion Papers 1167, C.E.P.R. Discussion Papers.
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