Many developing countries face difficulties in generating sufficient revenues for public expenditure. In some Arab countries, budget deficits and the unproductive use of public expenditures have limited the critical investments in both human resources and basic infrastructure that are necessary for providing a foundation for sustainable economic growth. In the last two decades, many Arab countries have embarked on economic and financial reform programs some of which are supported by the International Monetary Fund. These reform programs have usually included measures to raise tax revenues and to restructure tax systems.
The purpose of this study is to examine the determinants of tax revenue shares and to construct an index of tax effort for the Arab countries. This study makes use of pooled time-series and cross-sectional country data for the 1994-2000 time period for 16 Arab countries. The index of tax effort is constructed as the ratio of actual tax share to the predicted (or potential) tax share, as in previous work on this topic, Stotsky and WoldeMariam (1997), Tanzi (1981, 1987, 1992), Leuthold (1991) and Tait and Eichengreen (1978) among others.
It should be emphasized here that the main purpose of pan Arab comparisons of tax effort is to reveal whether an Arab country is limited in its revenue collections by a low capacity to generate tax revenues or by an unwillingness to use the available tax capacity to fund public expenditures. Another reason is to give guidance as to the proper mix of fiscal policy to undertake in the event of a budget deficit. If an Arab country facing a budget deficit imbalance were already making the maximum use of its taxable capacity, this would suggest that regaining budget balance would require expenditure rationing rather than tax increases.
The next section summarizes tax revenue performance in Arab countries. Section 3 presents the model and reviews the literature on previous studies and discusses the different approaches that have been used to examine the determinants of tax effort. Section 4 discusses the empirical results while section 5 gives the conclusions and some policy implications.