_Chart 9._ **Tax effort (Legal) with shadow, and Control of Corruption** <!-- Start of picture text --> Tax Effort (Legal) and Control of Corruption : All Countries Tax Effort (Legal) and Control of Corruption : ECA<br>SRB SRB<br>BIH BIH<br>IDNBLR MNE BLR MNE<br>TJK TJK<br>FRA<br>UKR SLV BRA ITAZAF GBRAUTCANCHESWEFINDNK UKR<br>KGZKAZRUSMDAALBKSVARGMKDTHAROMBGRTURTUNHRVLVALTUMYSSVKPOLCZEGRCKORHUN ESTSVNPRTESPJPNBEL DEU NORNLD KGZKAZ RUS MDAALBKSV MKD ROM BGRTUR HRV SVKPOLCZE<br>VEN ARMGEOMEX ARM GEO<br>AZE IRL AZE<br>CHL<br>COL<br>PER URY<br>-1 0 1 2 3 -1 -.5 0 .5<br>corruptmean corruptmean<br>Fitted values taxeffort2sA Fitted values taxeffort2sA<br>1.4 1.4<br>1.2 1.2<br>1 1<br>.8 .8<br>.6 .6<br><!-- End of picture text -->

# **_8. Conclusions_**

The tax collection in any country is influenced by a number of factors. In general, high income countries have higher tax shares as a proportion of GDP, though this is very much a policy choice and some high-income countries choose to levy lower taxes. Economies with a greater share of the shadow economy generally collect lower taxes than their potential. In addition, the nature of tax policies, inefficient tax administrations, weak institutions and poor quality of governance impact tax collections.

This paper adds to the existing literature on the key determinants of revenue potential in using a broad set of data and econometric methods. Earlier studies had not distinguished between the revenue potential based on economic fundamentals of countries and those based on their legal framework. This study examines the issue using this dual approach to revenue potential. Accordingly we get two sets of revenue potentials ‘revenue potential economic’ and ‘revenue potential legal’. The study also distinguishes between ‘tax gap’ and ‘tax space’. The difference between the revenue potential (legal) and the actual revenue collected is commonly understood as the ‘tax gap’. The difference between the revenue potential (economic) and the actual revenue collected we term the ‘tax space’. The tax space is the amount of revenue that a country can afford to collect, given its economic strength, not based on the country’s legislation.

The results show that revenue potentials (legal) are typically higher that the revenue potential (economic) in almost all countries indicating that in these countries legally mandated tax regimes were significantly higher than what the country’s economic fundamentals could afford. The study also shows that tax space was generally lower than the tax gap. A positive tax space indicates that the country is not fully utilizing its revenue potential up to its economic capacity. This study finds that most countries were fully utilizing their revenue potential up to their economic capacity. A large negative tax space (as in Belarus, Bosnia Herzegovina, Montenegro, Serbia and Ukraine) shows that the country is actually collecting way above its economic capacity. Among OECD members, the Nordic countries as well as Denmark, France and Italy show very high negative tax space.

The tax gap in countries is seen to be significantly higher the shadow economy is taken into account. For instance, the tax gap as a percentage of GDP in Azerbaijan increased from 3.73 percent to 6.60 percent, and in Ukraine’s from -4.25 percent to 0.50 percent. In Georgia too, the presence of a large shadow economy (65 percent of GDP) greatly amplified the tax gap from 2.81 percent to 6.37 percent of GDP.

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