1. 1 THIRD ANNUAL CONFERENCE ON REGIOAL INTEGRATION IN AFRICA (ACRIA 3) Hotel Fleur de Lys, Almadies, Dakar, Senegal Theme: Policy Coordination to Strengthen Regional Integration July 4-5, 2012 TAX EFFORT IN ECOWAS COUNTRIES M. Ben Umar Ndiaye & Robert D. Korsu (West African Monetary Agency)

2. 2 OUTLINE OF THE PRESENTATION 1. INTRODUCTION 2. LITERATURE REVIEW 3. METHODOLOGY 4. EMPIRICAL RESULTS 5. RECOMMMENDATIONS

3. 3 1. INTRODUCTION  Governments provide goods and services: - public goods, merit goods and social services (Education, Health, Physical infrastructure, Electricity, Water etc.) -Hence, it makes expenditure: Investment and consumption -It therefore requires revenue: Domestic and Foreign  Domestic Resource Mobilisation: Tax and Non-Tax Revenue

4. 4 1.INTRODUCTION EMCP: The Macroeconomic Convergence Criteria ( 4 Primary and 6 Secondary Criteria) Macroeconomic Convergence Criterion Relating to Tax Revenue: Tax Revenue to be at least 20 % of GDP Satisfaction of the Criterion from 2001 to 2010 : Gambia (2004), Cape Verde (2005 to 2010). Liberia (2009,2010). Ghana– good performance under the old GDP but poor performance with the new GDP Satisfaction of the Criterion: Challenging

5. 1.INTRODUCTION Fiscal Deficit, Tax Revenue and Tax Effort: The Link - A country operating above tax capacity : Requires Expenditure Rationalisation for deficit reduction -A country operating below tax capacity: Requires Tax Reforms to increase revenue How do we know whether a country is above or below the taxable capacity? Through Estimation of Tax Effort ( The extent to which a country can exploit its tax potential) 5

6. 6 1.INTRODUCTION Objectives i.To investigate the determinants of tax revenue in the ECOWAS Countries ii. To determine the tax effort of the ECOWAS Countries

7. 2. LITERATURE REVIEW  THEORETICAL CONCEPT Tax Effort was introduced by Lotz and Morss (1967), Bahl (1971). When: Tax Effort > 100 %, the country is above tax potential. In which case, there is difficulty in mobilising additional resources using tax policy Tax Effort < 100 %, the country is below tax potential In which case, it is not difficulty in mobilising additional resources using tax policy Tax Effort =100 %, the country is at its tax potential 7

8. 2. LITERATURE REVIEW  THEORETICAL CONCEPT Tax Effort is a model based concept It is actual tax ratio ( Tax-GDP ratio) divided by the predicted tax ratio ( from a model of tax ratio). Hence, it depends on the model applied 8

9. 9 2. LITERATURE REVIEW  EMPIRICAL LITERATURE Empirical Approach  Focus estimation of a tax share function and determination of tax efforts using actual tax ratio and the estimated model ( For example, Teera (2002, Piancastelli,2001, Bahl, 2003, Stotsky and WoldeMariam 1997, Ahsan and Wu, 2005, IMF (2011)  Common Data Type: cross-section and time series data  Common Estimation Method: Panel Data Technique- Pooled, Fixed and Random Effects  Recent but Uncommon Method: Stochastic Frontier (Pessino and Fenochietto (2010) and IMF (2011)

10. 10 2. LITERATURE REVIEW Departure of this study from previous studies  By focusing on the ECOWAS countries but considers some non- ECOWAS countries in the estimation.  Moreover tax effort is considered for the various tax categories: o Direct Tax o Indirect Tax o Trade Tax o Total tax with natural resource related tax o Total tax without natural resource related tax  Use of the Stochastic Frontier instead of Panel Data Regression

11. 3. METHODOLOGY A two-step Procedure (i) Estimation of Tax Revenue Function (ii) Construction of Tax Effort Index from (i) (i) Estimation of Tax Revenue Function Application of the stochastic frontier production function- developed by Aigner, Lovell and Schmidt (1977). Initially developed for measuring inefficiency in production and cost. Recently extended to tax function (Pessino and Fenochietto (2010) and IMF (2011) 11

12. 3. METHODOLOGY 12 i = 1,2,3…………. N: t = 1,2,3………T Where: Y is the output variable X is the vector of input variables is a vector of parameters to be estimated V is the stochastic disturbance term with zero mean, constant variance and is normally distribute U follows a truncated normal distribution with constant mean and variance. U is a measure of technical inefficiency. The Stochastic Frontier function as applied to production is given as

13. 3. METHODOLOGY In the context of tax function: Y is tax ratio (tax-GDP ratio) and X is a vector of determinants of tax revenue. In accordance with the Tax Literature ( for example, Pessino and Fenochietto (2010), IMF (2011), Teera (2004), Begun (1987), Tanzi (1978) and Bahl (1971), the components of X are: GDPPC, OPNM, AGRICS, URB, M2/GDP,LIR,INF Other variables maybe included in X but empirical studies do not include all the possible determinants (e.g Gini Coefficient which is a measure of income inequality, a measure corruption, a measure of debt overhang etc. 13

14. 3. METHODOLOGY Tax Revenue Function is calculated for 5 tax categories: direct, indirect, trade, total tax (with and without natural resource related taxes) (ii) Construction of Tax Effort Index (It ranges between 0 and 1 (i.e. 0 % and 100 %) Tax Effort of country i at time t is given as the ratio of actual tax ratio to predicted tax ratio. That is: 14

15. 3. METHODOLOGY The tax functions were estimated using data on all the 15 ECOWAS countries and 5 non- ECOWAS sub-Sahara African countries(SSA). These are: Botswana, Kenya, Namibia, South Africa and Zambia) over the period 2000 to 2010. The choice of the 5 non-ECOWAS -SSA countries was predicated on best tax performance over the period 1991-2006 based on IMF (2011) Data Sources: WDI, ADI, AEO and IFS 15

16. 3. METHODOLOGY ESTIMATION TECHNIQUE General to specific method: dropping of insignificant variables to arrive at the parsimonious model Both Battese and Coellie half normal (BCHN) and general truncated normal (BCTN) versions were estimated Use of Log-likelihood to decide the BCHN vs BCTN Use of LR test for presence of inefficiency- in the BCHN frontiers Use of Normal distribution (Z) test for presence of inefficiency- in the BCTN frontiers 16

17. 4. EMPIRICAL RESULTS 17 1.The Stochastic Frontier Tax Function: Direct Tax Variables Battese Coelli Half Battese Coelli Truncated CoefficientP-ValueCoefficientP-Value Constant0.1290.5930.0980.674 Ln( M2/GDP)---- Ln (AGS)- 0.2030.000- 0.2340.000 Ln ( GDPPC)---- Ln (URB)---- Ln ( OPN)---- Ln(LIR)0.6260.0000.6320.000 Log Likelihood = - 82.55Log Likelihood = - 76.56 Likelihood-ratio test for no inefficiency Chi squared = 42.16 (0.000) Z test for no inefficiency Z= - 5.73 (0.000)

18. 4. EMPIRICAL RESULTS 2.The Stochastic Frontier Tax Function: Indirect Tax 18 Variables Battese Coelli Half Battese Coelli Truncated CoefficientP-ValueCoefficientP-Value Constant1.9410.0001.9450.000 Ln( M2/GDP)0.1180.0000.1150.000 Ln(AGS)---0.0020.000 Ln ( GDPPC)---- Ln(URB)---- Ln ( OPN)---- Ln(LIR)0.1430.0000.1420.000 Log Likelihood = - 190.174Log Likelihood = - 187.310 Likelihood-ratio test for no inefficiency chi-squared: 34.88 (0.000) Z test for no inefficiency: Z= -2.05 (0.020)

19. 4. EMPIRICAL RESULTS 3.The Stochastic Frontier Tax Function: Trade Tax 19 Variables Battese Coelli Half Battese Coelli Truncated CoefficientP-ValueCoefficientP-Value Constant- 0. 1620.000-0.1620.000 Ln( M2/GDP)0.1580.0000.1570.000 Ln(AGS)---- Ln(URB)---- Ln ( GDPPC)0.0590.0000.0590.000 Ln ( OPN)0.3240.0000.3240.000 Ln(LIR)0.3160.0000.3150.000 Log Likelihood = - 219.26Log Likelihood = - 216.26 Likelihood-ratio test for no inefficiency chi squared=88.70 (0.000) Z test for no inefficiency: Z=-14.71 (0.000)

20. 4. EMPIRICAL RESULTS 4.The Stochastic Frontier Tax Function: Total Tax Including Natural Resource Related Taxes 20 Battese Coelli Half Battese Coelli Truncated CoefficientP-ValueCoefficientP-Value Constant1.3650.0001.9940.000 Ln( M2/GDP)0.1870.0000.2010.000 Ln (AGS)---- Ln ( GDPPC)---- Ln (URB)0.1020.0760.1180.042 Ln ( OPN)---- Ln(LIR)0.3880.0000.3680.000 Log Likelihood = - 14.581Log Likelihood = - 19.29 Likelihood-ratio test for no inefficiency: Chi-squared = 9.94 (0.001) Z test for no inefficiency: Z= -5.71(0.000)

21. 4. EMPIRICAL RESULTS 5.The Stochastic Frontier Tax Function: Total Tax Excluding Natural Resource Related Taxes 21 Battese Coelli Half Battese Coelli Truncated CoefficientP-ValueCoefficientP-Value Constant- 0.0950.0000.462 0.000 Ln( M2/GDP)0.0120.0000.0610.000 Ln (AGS)---- Ln ( GDPPC)0.0790.0000.0490.000 Ln (URB)0.0340.000-- Ln ( OPN)0.1490.0000.0540.000 Ln(LIR)0.5290.0000.5690.000 Log Likelihood = - 57.15Log Likelihood = - 56.74 Likelihood-ratio test for no inefficiency: Chi- squared = 64.86 (0.000) Z test for no inefficiency: Z= -11.478 (0.000)

22. 4. EMPIRICAL RESULTS 6. Tax Efforts of the Countries: 2000-2010 22 Country Direct TaxIndirect Tax Trade Tax Total Tax Excluding Natural Resource Related Tax Total Tax Including Natural Resource Related Tax Benin0.820.330.860.810.84 Burkina Faso0.780.670.300.780.77 Cote D’Ivoire0.730.320.430.540.85 UEMOAGuinea Bissao0.530.130.310.350.78 Mali0.790.240.810.800.86 Niger0.850.280.780.860.81 Senegal0.770.920.270.840.82 Togo0.630.110.510.470.78 Liberia0.770.360.700.680.86 Nigeria0.410.150.170.240.82 Gambia0.870.380.580.790.85 WAMZGhana0.820.860.360.750.78 Guinea0.830.550.310.720.81 Sierra Leone0.780.250.580.620.82 CAPE VERDE Cape Verde0.710.580.330.610.80 Botswana0.280.250.460.410.84 NON-ECOWASKenya0.840.750.150.590.80 Namibia0.900.560.750.880.82 South Africa0.880.770.060.700.80 Zambia0.870.210.660.650.82

23. 4. EMPIRICAL RESULTS 7. Tax Efforts of the Countries: 2010 23 Direct Tax Indirect TaxTrade Tax Total Tax Excluding Natural Resource Related Tax Total Tax Including Natural Resource Related Tax Benin0.880.381.000.970.88 Burkina Faso0.800.710.330.800.81 Cote D’Ivoire0.770.360.450.580.83 UEMOAGuinea Bissao0.21-0.040.070.80 Mali0.820.240.580.650.81 Niger0.910.520.601.000.95 Senegal0.900.820.230.840.82 Togo0.500.060.490.410.82 Liberia0.910.421.000.860.85 Nigeria0.550.200.090.250.81 Gambia0.890.930.020.710.88 WAMZGhana0.951.000.481.000.83 Guinea0.940.670.400.970.83 Sierra Leone0.800.260.310.490.86 CAPE VERDE Cape Verde0.660.900.230.570.82 Botswana0.210.280.450.390.89 NON-ECOWASKenya0.940.920.140.750.69 Namibia0.880.480.810.840.82 South Africa0.900.750.070.730.91 Zambia0.870.230.650.640.82

24. 5. RECOMMENDATIONS  Guinea Bissau, Togo and Nigeria: to enhance direct tax revenue mobilisation through improved tax administration as they have low tax effort on direct tax  ECOWAS countries: Require revision of procedure for mobilising indirect tax. A review of VAT administration procedure is important as VAT takes a chunk of indirect tax. VAT administration in Ghana and Senegal could be used as reference as these two countries have high tax efforts on indirect tax  The ECOWAS countries require efforts to improve trade tax mobilisation. This is more important in Burkina Faso, Guinea Bissau, Ghana, Guinea, Nigeria and Cape Verde as they are below potential by 70 %. However, Benin, Mali, Niger and Liberia are not candidates for this policy consideration since they have high trade tax efforts 24

25. 5. RECOMMENDATIONS  Guinea Bissau, Togo and Nigeria require shifting tax administration from emphasis on natural resource related taxes to other tax types  Continued encouragement of the banking sector for making payments by the private sector as financial depth has positive effect on indirect and trade tax revenue  Emphasis on policies that would encourage the development of the agricultural sector so that it becomes an easy-to-tax sector- for example, developing the transformation of agricultural products to industrial products. This flows from the fact that agricultural share of GDP has a negative effect on direct and indirect tax 25

26. 5. RECOMMENDATIONS  As ECOWAS countries impose taxes on imports, a policy of no non-tariff barriers should be encouraged and maintained, except for health, social and security reasons. This flows from the fact that openness of the ECOWAS economies has a positive effect on trade tax revenue  Effort at improving literacy rates should be sustained as literacy rate has positive effect on all the tax types considered  Strengthening of supply-side policies to improve economic growth. This includes: investment in physical capital ( roads, electricity etc.) and health. This derives from the positive effect of per capita GDP on tax revenue 26

27. 27 THE END THANK YOU FOR YOUR ATTENTION