State Institutions and Tax Capacity: An Empirical Investigation of Causality

August 16, 2019

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Format: Chicago

Olusegun Ayodele Akanbi. State Institutions and Tax Capacity: An Empirical Investigation of Causality, (USA: International Monetary Fund, 2019) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Would better state institutions increase tax collection, or would higher tax collection help improve state institutions? In the absence of conclusive guidance from theory, this paper searches for an empirical answer to this question, using a panel dataset covering 110 non-resource-rich countries from 1996 to 2017. Employing a panel vector error correction model, the paper finds that tax capacity and state institutions cause and reinforce each other for a wide range of country groups. The bi-directional causality results suggest that developing tax capacity and building state institutions need to go hand in hand for best results, particularly in developing countries. Based on the impulse response analyses, the paper also finds that the causal effects in advanced economies are generally low in both directions, while in developing countries, both tax capacity and institutions shocks have larger positive impacts on institutions and tax capacity, respectively.

Subject: Revenue administration, Revenue Administration Fiscal Information Tool (RA-FIT), Subnational tax, Vector error correction models

Keywords: Confidence interval, Tax capacity, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/177
Stock No:

WPIEA2019177
ISBN:

9781513509860
ISSN:

1018-5941

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