Taxes for the People or for the Government? A Global Governance Perspective

Abstract

The paper investigates the determinants of taxes collected net of public services for a sample of 104 countries from all over the world over 1996-2016 period. Starting from the assumption that what really matters for the taxpayer is the tax money that actually return to the society, after paying the cost of government, we introduce the concept of taxes collected net of public services as the difference between taxes to GDP ratio and general public services expenditures to the GDP ratio and investigates its determinants from governance perspective. The main determinants looked upon were worldwide governance indicators (WGI): control of corruption, government effectiveness, political stability, regulatory quality, rule of law and voice and accountability, taken from World Bank surveys. As control variable we used GDP per capita annual growth rate. We include year fixed effects in order to control for global economic crisis, and also country fixed effects to control for unobservable country-level factors that are constant over the sample period. The analysis follows the World Bank country classification on level of development: low income, lower middle-, higher middle income and high-income countries. The results show that the rule of law governance characteristic affected the taxes net of public services the most, both in terms of economic effect and of countries coverage, while the control of corruption and regulatory quality were found significant only for lower-middle income countries and low-income countries respectively. Policy recommendations were made accordingly.