A New Approach to Measuring Tax Effort
Oliver Morrissey
Round 1
Reviewer 1 Report
The revised manuscript does not include, as is normal practice, an explanation by the author of how the comments have been addressed. Absent this, I am not willing to read it again so recommend rejection. From a quick look it appears that all the author did was add some extra text which is not how one responds to comments.
Author Response
See attached our detailed report.
Sincerely yours,
Professor Basil Dalamagas
Professor in Public Finance
National & Kapodistrian University of Athens
Department of Economics
1, Sofokleous & Aristidou str., PC. 105 59, Athens, Greece
Email [email protected]
Phone 00302103689436
Author Response File: 
Author Response.pdf
Reviewer 2 Report
The authors appear to have met my earlier objections in their revision.
Author Response
See attached our detailed report.
Sincerely yours,
Professor Basil Dalamagas
Professor in Public Finance
National & Kapodistrian University of Athens
Department of Economics
1, Sofokleous & Aristidou str., PC. 105 59, Athens, Greece
Email [email protected]
Phone 00302103689436
Author Response File: Author Response.pdf
Reviewer 3 Report
Please see attached referee report.
Comments for author File: Comments.pdf
Author Response
See attached our detailed report.
Sincerely yours,
Professor Basil Dalamagas
Professor in Public Finance
National & Kapodistrian University of Athens
Department of Economics
1, Sofokleous & Aristidou str., PC. 105 59, Athens, Greece
Email [email protected]
Phone 00302103689436
Author Response File: Author Response.pdf
Round 2
Reviewer 1 Report
The revised paper is an improvement, but the remaining weakness is motivation – why should readers (researchers) be interested in using the proposed approach? In their response to earlier comments, the authors argue that their aim is (simply) to introduce a new approach to be judged on its own merits. To convince others, the new approach should offer some benefit, and the most promising argument is for the interpretation. Conventional tax effort measures simply compare actual revenue to an estimate based on notional capacity (based on features of the economy associated with determinants of revenue). This approach offers a different interpretation – how does actual revenue compare to a theoretical optimal level.
The authors find that most countries are below the estimated ‘optimal’ level, but leave it at that. The paper would be improved by discussing whether the estimated optimal level overstates what authorities may want to raise in tax revenue; for example, political economy considerations may motivate below optimal tax. This would be an opportunity to discuss how factors excluded from the theoretical model may explain lower observed tax levels. For example (with the two comments rejected on grounds of the theory), public borrowing implies lower than optimal current tax, as may preference for public goods (given model parameters).
Author Response
See attached our detailed report.
Sincerely yours,
Professor Basil Dalamagas
Professor in Public Finance
National & Kapodistrian University of Athens
Department of Economics
1, Sofokleous & Aristidou str., PC. 105 59, Athens, Greece
Email [email protected]
Phone 00302103689436
Author Response File: Author Response.pdf
Reviewer 3 Report
I find the revised version significantly improved. The authors present their methodology and empirical results in a clear and coherent way. The analysis has been enriched with comments on the empirical results that make the contribution of the study stronger and the authors acknowledge possible limitations of the methods employed and their potential effects on the findings. The updated version also features an extension to account for shortcomings of the original model.
Author Response
The comments of the Reviewer 3 do not suggest any kind of changes, corrections or revision to the manuscript.
Sincerely yours,
Professor Basil Dalamagas
Professor in Public Finance
National & Kapodistrian University of Athens
Department of Economics
1, Sofokleous & Aristidou str., PC. 105 59, Athens, Greece
Email [email protected]
Phone 00302103689436
This manuscript is a resubmission of an earlier submission. The following is a list of the peer review reports and author responses from that submission.
Round 1
Reviewer 1 Report
The basic (and novel) idea of the paper is to use optimal tax revenue as the proxy for tax capacity, and the deviation of actual revenue from this as the indicator of tax effort. As with alternative methods, this relies on the validity of the tax capacity measure from which tax effort is derived.
The core concept is that ‘optimal tax revenue is derived from a utility maximization process, where the government chooses the proper set of public goods to maximize social welfare, subject to the constraint that the direct-indirect tax system will yield sufficient revenue to finance the required level of government spending’ (p2). Estimates in the paper are based on a sample of 30 developed countries.
Section 2 estimates a conventional ‘tax ratio equation’ with a variety of estimators. The qualitative results are in line with previous literature. Note that GMM is designed for cases of ‘large N, small T’ and is not appropriate (underlying assumptions are not all met) for this data where N=30 and T=13 (T is large relative to N). Table 2 compares the derived tax effort measure with other estimates in the literature for the 30 countries in the sample. In general, the ‘own estimates’ are quite different, typically falling outside the range of other estimates (sometimes above, sometimes below), and the implied ranking of countries looks like it would be quite different (confirmed in Table 3). This raises concerns as one would expect estimates for developed countries to be quite consistent (perhaps excepting Central and Eastern Europe). This is only the case for the Pearson uncentered correlation (which is high); other correlations are low. Although not reported, the other estimates seems more consistent with each other than they are with the ‘own estimates’, suggesting the own estimates offer no improvement.
Section 3 derives the optimal measure of tax effort. There appear to be two major weaknesses. First, the omission of public borrowing capacity, which implies lower current tax for given spending (as some of the burden is transferred to the future); this will vary across countries and over time. Second, no allowance for the preference for public goods (which may be higher in some countries than others, such as Scandinavia compared to the US). Theoretically, one would like a preference parameter to capture whether tax effort is high or low. Table 4 presents the estimates (there is no full elaboration of how they were calculated), and Table 5 the correlations with other estimates. Again, the Pearson uncentered correlation is very high (demonstrating that it is uninformative) whereas other correlations, notably for rank, are low. The paper merely comments on the correlations, it does not offer explanations for discrepancies.
The paper provides different estimates for tax effort, but does not demonstrate that they are ‘better’ or more plausible than other estimates. One response is to suggest that as tax effort is a latent variable, it is appropriate to derive a range of estimates from different methods. The true value is likely to be within this range but, if the width varies across countries, it is difficult to establish where within this range. Another response is to ask how plausible the new estimates are. The change comparing 2010-15 to 1995-2009 offers clues. It may be plausible that implied tax effort increased significantly in Greece, Italy and Portugal as all were severely hit by the financial crisis, but this does not explain the increase in France and, more importantly, does not explain the decrease, for example, in Ireland or Germany. The paper lacks elaboration on the validity and value of the new estimates.
Overall, it is not evident that the new measure avoids the criticisms made of previous approaches or is any more reliable or useful than existing measures.
Reviewer 2 Report
See attached file
Comments for author File: Comments.pdf
Reviewer 3 Report
Please see attached file.
Comments for author File: Comments.pdf
