Abstract
This endeavour intends to examine the impact of institutional quality
and governance indicators on tax to GDP ratio utilising cross country
empirical analysis. Generally, amount of tax revenue collection is
considered a pure economic phenomenon related to level of economic
activity in a certain country. This paper deviates from this common
perception. Hence it utilises new institutionalists’ stance that
governance and institutional quality are major determinants of
economic and government efficiency in a country consequently revenue
collection too. It also focuses the examination of efficiency and
effectiveness impacts of tax administrations in order to achieve
enhanced revenue collection targets. In the wake of measuring impact
of governance and institutional quality, six World Bank governance
indicators namely corruption, political stability, rule of law,
government effectiveness, regulatory authority, and voice and
accountability have been regressed with tax to GDP ratio as
dependant variable. Panel data is used for a span of six years.
Inclusion of population, economic growth rate, imports as percent of
GDP and exports as percent of GDP as control variables are used to
test robustness of the model. A stratified random sample of thirteen
developing and thirteen developed countries tests the validity of the
model. Empirical analysis suggests a positive relationship between tax
to GDP ratio and the above mentioned six governance indicators. It
provides empirical evidence that by improving governance in areas like
political stability, corruption, regulatory effectiveness, voice and
accountability likely to provide more robust policy options for
enhancing revenue collection rather increasing tax rates and tax base.
The paper also presents comprehensive set of policy options based on
empirical results and literature on the subject for policy practitioners.
Shahzad Hussain, Naveed Ilahi, Muhammad Muqeem ul Islam. (2016) Impact of Institutional Quality and Governance on Tax-GDP Ratio: A Cross Country Analysis , Journal of Managerial Sciences, Volume 10, Issue 2.
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