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The capacity of governments to raise taxes

Author

Listed:
  • Oguzhan Akgun

    (OECD)

  • David Bartolini

    (OECD)

  • Boris Cournède

    (OECD)

Abstract

This paper investigates the factors that shape governments’ capacity to collect revenue. To do so, it analyses how tax revenue responds to tax rates using evidence from a panel of 34 OECD countries over 1978-2014. The estimations show that the response of revenue to rates weakens as rates become higher, confirming the existence of a hump-shaped relationship between tax revenue and rates for corporate income taxation and providing a new contribution by analysing value-added taxation. Importantly, the estimated responses of revenue to tax rates vary, in some cases very strongly from an economic perspective, depending on country-specific policies and framework conditions. In particular, the corporate income tax revenue-generating potential of hiking the effective rate shrinks much more quickly in more open economies than in more closed ones. Tax revenue is found to be more responsive to tax increases in countries where the tax authorities have more resources. The investigations also cover personal income taxation. They point to diminishing revenue returns of increasing the effective marginal tax rates that apply at substantially above-average income levels.

Suggested Citation

  • Oguzhan Akgun & David Bartolini & Boris Cournède, 2017. "The capacity of governments to raise taxes," OECD Economics Department Working Papers 1407, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:1407-en
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    File URL: https://doi.org/10.1787/6bee2df9-en
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Oguzhan Akgun & Boris Cournède & Jean-Marc Fournier, 2017. "The effects of the tax mix on inequality and growth," OECD Economics Department Working Papers 1447, OECD Publishing.
    2. Jean-Marc Fournier & Manuel Bétin, 2018. "Sovereign defaults: Evidence on the importance of government effectiveness," OECD Economics Department Working Papers 1494, OECD Publishing.
    3. Boris Cournède & Jean-Marc Fournier & Peter Hoeller, 2018. "Public finance structure and inclusive growth," OECD Economic Policy Papers 25, OECD Publishing.
    4. Christine Lewis, 2019. "Raising more public revenue in Indonesia in a growth - and equity-friendly way," OECD Economics Department Working Papers 1534, OECD Publishing.
    5. Jean-Marc Fournier & Manuel Bétin, 2018. "Limits to government debt sustainability in middle-income countries," OECD Economics Department Working Papers 1493, OECD Publishing.

    More about this item

    Keywords

    country-specific circumstances; effective marginal tax rate; framework conditions; interactions; Laffer curve; personal income tax; social security contributions; value added tax;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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