to provide a starting point for tax policy discussion and design. The structure of the paper is as follows.

Section II provides an overview of the worldwide trend in revenue collection, using the common tax-to-GDP index as the cross country benchmark for collection. Section III highlights some critical problems in using the tax-GDP ratios to measure tax performance and extends the existing literature to the empirical estimation of a country’s taxable capacity. This section also shows a comparison between a country’s actual collection and its estimated taxable capacity to derive an index of tax effort. On the basis of their respective level of actual collection and tax effort, four distinct groups of countries are classified distilling some policy implications for revenue reforms. Section IV concludes with a summary of the overall pattern and worldwide trends in tax performance and brief remarks on the challenges in designing an effective tax reform program.

# **II. Pattern and Worldwide Trend in Taxation**

Tax economists and tax practitioners usually rely on, inter alia, the ratio of tax collection as a share of gross domestic product (GDP) to assess the level of collection effort of a country and establish worldwide patterns and trends for tax collection efforts. The index is calculated on a regional or income classification basis, and also country-by-country. To provide deeper analysis of a country’s tax performance in comparison with its peers, existing tax collection structures are also assessed using the share of each type of tax in GDP or in the total tax collection. The measurement and interpretation of such indexes are relatively simple and straightforward.

This section provides an overview of the regional and international pattern and trend in tax collection, using the conventional tax-GDP ratios. To specify how the pattern has changed in the past decade (1994-2003), the data are collected from 104 countries and presented in three benchmark years: 1994, 1998, and 2003. The data are from IMF Government Finance Statistics (GFS) and the World Development Indicators (WDI). Each country’s data are weighted equally and the countries in the sample for which GDP data are available are divided into regions and income groups.<sup>3</sup> The data reconfirm the patterns and trends already presented by a number of leading economists (Bird 2007;Fox, et al. 2005).

First, tax collection for a country – as a percentage of GDP (measured at market prices) – usually rises as the country’s per capita income level increases. Second, region-specific patterns of collection have been established, which may well reflect certain common features of socio-economic conditions and tax regimes in the neighboring countries.

> 3 The regional and income group classification is based on the World Bank definition. The World Bank classifies countries into four groups by their income level on the basis of 2005 GNI per capita (unit of currency: USD): Low income group includes countries with GNI per capita of $825 or less; lower middle income, $826–3,255; and upper middle income, $3,256–10,065; and high income, $10,066 or more.  For the purpose of our analysis, we have formed three groups of countries:  Low income countries with the 2005 GNI per capita of $825 or less, Middle income countries, $826–10,065, and High income countries, $10,066 or more.

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