PFR Fundamentals : Tax Productivity

Overview & Synopsis

The ability of governments to raise tax revenues to finance public services and promote economic development varies due to a wide variety of economic, institutional, and political factors. Many of these variables are difficult or impossible to observe, especially in data-poor environments. Nonetheless, it is helpful to assess a country’s tax performance against a common standard to reveal scope for improvement against nationally defined goals, past performance, or the performance of peer countries. Tax productivity indicators measure how well a tax system generates revenue relative to the size of the tax base and a standard tax rate. VAT C-efficiency is calculated for Value Added Tax (VAT), and is a relatively well-established technique.1 CIT productivity and PIT productivity are calculated for Corporate Income Tax (CIT) and Personal Income Tax (PIT), respectively. y. This note uses “tax productivity” to refer collectively to all of the indicators. It uses the term “VAT C-efficiency” to refer to the indicator calculated for VAT, since that specific term is well established in the literature, especially at the IMF (it is referred to as the “VAT revenue ratio” by the OECD). Finally, this note uses “CIT productivity” and “PIT productivity” to refer to these less-well established indicators to avoid additional confusions that might arise from using the term “efficiency”. The calculation of tax productivity is just a first step in analyzing the performance of the tax system. It is recommended that the results are coupled with additional data or contextual knowledge about the country’s tax policy and tax administration. This can help explain fiscal outcomes or inform more detailed policy recommendations. VAT C-efficiency, CIT productivity, and PIT productivity indicators are calculated by the Fiscal Policy unit using the methodology and data described below. Users can find the results in the PFR Resource center, as a bulk download or charted in the PFR Data Visualization Tool. The next section of this note details the methods used to calculate tax productivity indicators. Following that is a brief section on data sources. Next, the calculated estimates are presented along with brief guidance on their interpretation. The final section shows how tax productivity metrics were applied in select PFRs.