Determinants of tax effort: A cross country analysis

Mark Alan McCoon


This paper analyzes the determinants of tax effort. Tax effort is defined as the aggregate tax level of a country divided by its Gross Domestic Product. A country's tax effort is an expression of the tax burden the government imposes on the economy. One of the most fundamental issues confronting a society is the size of the governmental sector. How large should the government be relative to the size of the economy? The nations of the world have crafted many different answers to that question as evidenced by the fact that tax effort and the size of government sectors varies widely. At the low tax extreme countries such as Guatemala can have tax efforts as low as ten percent of GDP while at the other extreme high tax countries such as Sweden have tax efforts in excess of fifty percent of GDP (World Bank 2010). While part of the variation in tax effort and the size of government among countries has been explained, much remains unexplained. The extent to which national cultural attributes as determined by Hofstede (2005) and the World Values Survey (2010) affect total tax levels is explored in this paper. In other words, this paper answers the question: does culture affect total tax effort and the size of the governmental sector? This research contributes to the literature by explaining more of the difference in tax effort among nations and by expanding our understanding of why some countries are high tax states and others are low tax states.