Effective Mechanisms for Raising Tax Revenues

How well raising tax rates can succeed for an economy intent on increasing tax revenue and narrowing the tax-to-GDP-ratio gap with other economies depends on its ability to meet certain conditions. This paper investigates these conditions and demonstrates that expanding the tax base as a proportion of GDP, either through a tax rate increase or rationalizing loopholes and tax expenditure, is crucial if efforts to increase tax revenues are to be effective. We test this theoretical finding through empirical analysis, including the Instrumental Variables—Two-Stage Least Squares (IV-2SLS) approach, and show how broadening the tax base is critical not only for increasing tax revenues but also for ensuring that an increase in the tax rate expands fiscal revenue. The findings highlight the importance of a balanced approach in tax policy design to achieve revenue goals while maintaining economic efficiency.