Impact of Institutional Quality and Governance on Tax-GDP Ratio: A Cross Country Analysis.

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. [ABSTRACT FROM AUTHOR]