A Stochastic Frontier Estimation of Tax Efficiency in the Economic Community of West African States (ECOWAS)
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Date
2020-11-15
Authors
Korsu, Robert Dauda
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research consortium
Abstract
The objective of this study is to investigate the determinants of non-natural
resource tax revenue and estimate its efficiency in ECOWAS countries. A
stochastic frontier tax function was estimated using annual data from 2001
to 2015 by use of Maximum Likelihood procedure. The results show that
trade openness, financial deepening, and urbanization matter for tax revenue
mobilization in ECOWAS, with the first two variables having a positive effect and
the latter having a negative effect; tax inertia is found to be strong. The estimated
non-natural resource tax efficiencies show that during the period 2001-2015,
the tax efficiencies of ECOWAS countries were above 90.0% of their potential, except for Nigeria, which had 67.7%. The losses in non-natural resource tax revenue
due to inefficiencies were generally low, ranging from 0.6% of Gross Domestic Product
(GDP) in Sierra Leone to a maximum of 1.8% in Liberia, followed by 1.7% in Cape
Verde, Ghana, and Guinea Bissau. In addition, countries with high natural resource
taxes tend to have low efficiency on non-natural resource taxes, and this efficiency
tends to be high where non-natural resource tax is high. Tax revenue mobilization in
the ECOWAS countries should therefore be strengthened through continued policy
efforts to improve financial deepening, trade openness and decentralization that can
reduce urbanization. It is also imperative for ECOWAS tax authorities to consider the
level of their tax potential in setting targets for non-natural resource tax mobilization.
In addition, more efforts should be put on raising non-natural resource tax revenue
than the volatile natural resource tax. Tax restructuring policies that favour direct
tax revenue, especially business income tax, and domestic indirect taxes such as
Value Added Tax or Goods and Services Tax should be given priority, as the African
tax structure and performance review shows that countries with high shares of direct
and domestic indirect tax led on tax GDP ratios.