Table 3 groups countries on the basis of tax effort versus the level of actual tax collection (high, medium and low).<sup>15</sup> Countries which have high tax collections and high tax effort include Belarus, Bosnia & Herzegovina and Montenegro and Serbia in the ECA region and high income countries in the OECD region. These countries already are taxing their economies at high levels and the tax authorities are already performing close to or above their potentials. Hence, these countries should aim for improving tax efficiency to enhance tax revenues. Countries with low tax collections and low tax effort include Albania, Armenia, Azerbaijan and Georgia in the ECA region and middle income countries in the LAC region. In these countries, there is considerable room to increase tax revenues both through suitable tax policy measures as well as tax administration reforms. The two low income countries in the sample, Kyrgyz Republic and Tajikistan, have low tax collections and medium to high tax efforts. In both these countries, the shadow economy is estimated to be close to 40% of the GDP and the tax administration is also weak (as seen in Annex A, Table A(6)). Hence, considerable gains in tax revenues can be achieved through policies that encourage the growth of the formal sector and more efficient tax administration.

_Table 3_ : **Tax Effort Indices and Tax Collection**

||**L**|**OW**|**ME**|**DIUM**|**H**|**IGH**|
|---|---|---|---|---|---|---|
||**ECA **|**Others**|**ECA **|**Others**|**ECA **|**Others**|
|**TIONS**<br>**LOW**|Albania<br>Armenia<br>Azerbaijan<br>Georgia|Argentina<br>Chile<br>Colombia<br>Korea, Rep<br>Mexico<br>Peru<br>Thailand<br>Uruguay<br>Venezuela|Kazakhstan<br>Kosovo<br>Kyrgyz Rep<br>Turkey|Malaysia|Tajikistan|El Salvador<br>Indonesia|
|**LEC**|**ECA **|**Others**|**ECA **|**Others**|**ECA **|**Others**|
|**TAX COL**<br>**MEDIUM**|Moldova<br>Poland<br>Slovak Rep|Ireland<br>Portugal|Bulgaria<br>Macedonia<br>Romania<br>Russian Fed|Estonia<br>Greece<br>Japan<br>Latvia<br>Lithuania<br>Tunisia|Ukraine|Brazil<br>Canada<br>Switzerland<br>South Africa|
||**ECA **|**Others**|**ECA **|**Others**|**ECA **|**Others**|
|**HIGH**|||Croatia<br>Czech Rep|Belgium<br>Germany<br>Hungary<br>Netherlands|Belarus<br>Bosnia&Herz.<br>Montenegro<br>Serbia|Austria<br>Denmark<br>Finland<br>France|

15 This classification is a modified version of the classification made in Tuan Minh Le (2008) et al, “Expanding Taxable Capacity and Reaching Revenue Potential”, World Bank Policy Research Paper.

“ **Tax Collection with Shadow”** is the actual tax collections as a percent of an “estimated GDP”. The “estimated” GDP includes the reported GDP plus the additional GDP generated by the shadow economy, ie, GDP (estimated) = GDP+ 0.33*(shadow*GDP). **Tax Effort (with shadow** ) = “Tax Collection with Shadow” / Potential Tax Revenue (Legal). A country is classified as having “Low” tax effort (E) if E < 0.85; “medium” tax effort if 0.85 ≤ E ≤ 0.95; “high” tax effort if E > 0.95.

The mean Tax-GDP ratio in sample of 61 countries is 29.87 percent. The standard deviation is 9.08. A country is classified as “medium tax collection” (C) country if it is 1⁄2 a standard deviation below or above the mean tax to GDP collection ratio. Accordingly, a country is classified as “ _low collection_ ” country C < 25.5; a “ _medium tax collection”_ country if 25.5 ≤ C ≤ 34.0; and “ _high tax collection_ ” country if C > 34.0.

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