TAX EFFORT IN ECOWAS COUNTRIES 2011
Tax revenue mobilization is essential in the fiscal operations of every economy. The Economic Community of West African States (ECOWAS) therefore has a criterion on tax revenue under the convergence criteria of the ECOWAS Monetary Cooperation Programme (EMCP), which states that tax ratio (as a percentage of GDP) should be at least 20 percent. Despite the different tax reforms in the various member states the satisfaction of this criterion remains a challenging one. The objective of this study is therefore to investigate the determinants of tax revenue and construct an index of tax effort in the various economies of the ECOWAS region. Such investigation provides information on those countries that are operating their tax systems below capacity and those that are operating above their tax potential given the nature of the economies, with a view to providing guiding principles for fiscal policy operations. The methodology involved the estimation of stochastic frontier tax functions for direct tax, indirect tax, trade tax and total tax (with and without natural resource related tax) for all the ECOWAS countries with the inclusion of five non-ECOWAS sub-Saharan African countries in the estimation, over the period 2000 to 2010. The tax efforts of these countries were determined from the stochastic frontier estimations over the period 2000 to 2010. The results of the stochastic frontier tax functions show that literacy rate has a positive effect on all the categories of tax considered, financial depth has a positive effect on indirect tax and trade tax, agricultural share of GDP has a negative effect on direct and indirect tax, and openness of the economies to import and GDP per capita have positive effects on trade tax.
The results of the tax effort estimation show that all the ECOWAS countries are below their tax capacities though with differences in magnitude across tax type and countries. Tax efforts on direct taxes in 2010 were more than 70 percent for most of the countries,
with the exception of Guinea Bissau, Togo and Nigeria, with tax efforts on direct tax being 21, 50 and 55 percents respectively. Tax efforts are higher on direct taxes than on trade and indirect taxes while tax efforts on indirect taxes are higher than efforts on trade taxes for most of the ECOWAS countries. Moreover, with the exception of Burkina Faso and Senegal from UEMOA and Ghana from WAMZ, all the ECOWAS countries are below their tax potential on indirect tax by more than 30 percent. With the exception of Benin, Mali and Niger in the UEMOA and Liberia in the WAMZ all the ECOWAS countries were operating more than 40 percent below their trade tax potential. This is more acute in Nigeria, Senegal, Burkina Faso, Guinea Bissau, Guinea, Ghana and Cape Verde which were below their trade tax potentials by about 70 percent or more over the period 2000 to 2010. Guinea Bissau in the UEMOA and Nigeria in WAMZ had high tax efforts (more than 75 percent in 2010 and over the period 2000 to 2010), when natural resource related taxes are included in total tax revenue but the exclusion of natural resource related taxes from total tax revenue reduced the tax efforts of these countries to 24 and 35 percents respectively for Nigeria and Guinea Bissau in 2010, and 25 and 7 percent respectively for Nigeria and Guinea Bissau over the period 2000 to 2010. Other countries which were high tax effort countries with the inclusion of natural resource related taxes remained high tax effort countries with the exclusion of natural resource related taxes.