Measuring taxable capacity in Libya

This thesis measures the tax effort and taxable capacity in Libya and examines an important research question: " Has the tax burden reached the level of full tax capacity in Libya? ". The main motivation of the study is the need to diversify the sources of the Libyan economy. To this end the thesis presents a conceptual framework for tax burden, excess of tax burden, theory of optimal taxation, concept of taxable capacity, concept of tax effort.The framework is used to reviews the developments of the Libyan economy and the impact on tax effort. The thesis has explored several aspect of tax performance in Libya. First, it analyses the trends of public revenues, public revenues, public spending in final stances of the government. Second, it studies the tax structure and the relative importance of tax sources through the analysis of marginal propensity to tax and the income elasticity of taxes. Third, it examines the evolution of Libya's tax system particularly the income tax system. Finally, various econometrics models such OLS regression, Ordinary ridge regression, and Unbiased ridge regression are used to measure the tax performance such as tax burden, tax effort and tax capacity using time series data covering 1970 to 2000, and panel data covering 2001 to 2007. A fixed and random effect model are used to compare if the determinants of Libya’s tax efforts differs from that of a range of selected oil producing countries. These countries are: Algeria, Argentina, Bahrain, Bangladesh, Bolivia, Botswana, Brazil, Cameroon, Chad, Chile, Colombia, Republic of Congo, Cote d'Ivoire, Equatorial Guinea, Ecuador, Egypt, Emirates, Ethiopia, Ghana, Guatemala, Guyana, Indonesia, Iran, Kenya, Kuwait, Lesotho, Libya, Mauritania, Nigeria, Oman, Peru, Saudi, Trinidad and Tobago, Tunisia, Venezuela, Yemen, Zambia, Zimbabwe. This research consists of seven chapters: Chapter One provides a background; Chapter Two provides the literature review; Chapter Three 4 gives a brief overview of the development of the Libyan economy, while in Chapter Four there is a description of the public finances in Libya; this is followed in Chapter Five by a review of the tax system in Libya; Chapter Six presents the study’s analyses and findings; Chapter Seven provides the conclusions and recommendations. The main findings of this research are: First, in Libya, tax burden per capita is high; Second, the tax bases in Libya were narrow reflecting the government's heavy reliance on oil revenue; Third, the level of taxable capacity in Libya is also low compared to the selected oil producing countries for a variety of reasons, including: narrow tax bases, failure to diversify the tax sources, and the public sector being subject to tax. The argument is presented that the Libyan economy has reached the full utilization of its taxable capacity. In addition, the study found that the following factors have a major positive impact on Libya's taxable capacity and tax effort: the national product of the service sector, money supply, level of business freedom, level of economic freedom, currency in circulation and tax penalties. In contrast, two factors are found to be negatively affecting the taxable capacity and tax effort in Libya: non-oil exports, oil revenues. The contributions of this study to the literature are twofold: first, this is the first of its kind to provide comprehensive analyses of Libya’s tax performance; Second, it has added some new variables such as oil revenues, non-oil exports, currency in circulation, money supply(M1), and tax penalties in testing the determinants of tax effort into the model built by previous researchers. Finally, the research results shed lights on how Libya government may diversify the Libyan economy and encourage growth in the non-oil private sector through proper taxation mechanisms.