Determinants of Level of Taxation: An Empirical Study of OECD Countries from 2006 to 2016

The paper provides an empirical examination of the determinants of tax level (tax-to GDP ratio) among OECD member countries from 2006 to 2016. Conventional regression studies of tax level tend to focus on two sets of factors: structural (such as GDP per capita, output share of agriculture, age dependency ratio, etc) and institutional (such as corruption, political stability, etc). The present paper employs a different approach that emphasises the role of tax policy and tax administration in explaining tax level in developed countries. More specifically, it seeks todetermine the quantitative impacts of tax rate, tax compliance burden, governance, level of economic development and trade openness on tax level of OECD member countries. The paper is motivated by different considerations. First, there seems to be a lack of tax level studies focusing on developed countries. Secondly, and more importantly, most, if not all, of the determinants of tax level in previous studies are typically beyond the control of tax authorities, at least in the short run. It thus seems useful to include factors that are under the direct or indirect control of the tax authorities. To this end, we note that proxies of tax rate and tax compliance burden are now available in a consistent and comparable basis from the PwC and the World Banks’ panel database.The OECD is chosen because it is a set of developed countries with generally comparable tax systems, especially those belonging to the European Union. Further, the OECD provides a wide range of consistent and reliable data of member countries. The period of study from 2006 to2016 represents the longest and most recent period in which required data is available and comparably reliable. The dataset thus consists of 32 OECD member countries (four countries are excluded due to data unavailability) extending over an 11-year period from 2006 to 2016