Tax effort in Sub-Saharan Africa

Many sub-Saharan African countries face difficulty in raising tax revenue for public purposes. Low per capita incomes, an economic base in subsistence agriculture, poorly structured tax systems, and weak tax and customs administrations all contribute to difficulties in raising tax revenues. This study uses panel data on 43 sub-Saharan African countries during 1990.95 to measure the determinants of the tax share in GDP and to construct a measure of tax effort. The results indicate the extent to which countries make use of their potential tax bases to raise revenues and they can be used to provide guidance on the proper mix of fiscal policy in the event of budgetary imbalance. For 30 countries for which data on sectoral shares in value added are available, the analysis suggests that the shares of agriculture in GDP and mining in GDP are both negative and significantly related to the tax share, and that the export shares in GDP and per capita income are both positive and significantly related to the tax share. For 43 countries for which complete data on agricultural share in value added alone is available, the share of agriculture in GDP is again negative and significant, export share in GDP is again positive and significant, per capita income is not significant, and import share is positive and significant in some variants. No strong link between Fund programs and tax shares is found, on average. The measure of tax effort is constructed as the ratio of the actual tax share to the predicted (or potential) tax share. The results suggest that the countries with a relatively high tax share tend to have a relatively high tax index, although these results are not uniform across the countries.