Measuring Tax Revenue and Tax Base Erosion: Evidence from Taiwan

Abstract

Essentially, tax evasion is a gamble taken by private agents and limited “public-sector.” It is difficult to get accurate information about the extent of underground economy activities in the goods and labour market, since individuals engaged in those activities wish not to be identified. This study explores the relationship between economic growth, tax rate, debt, consumer price index and tax revenue. It does so while parting from traditional methodology, instead adopting SUR-OLS method and Threshold approach for estimating the response of economic growth on total tax revenue, direct tax revenue and indirect tax revenue in Taiwan from 1991- 2020. This paper further discusses the response of total tax, direct tax and indirect tax to fluctuations in tax rate. We show that with a tax rate between 12.59% and 13%, increase in income leads to decrease, not increase, in direct tax revenue, resulting in serious tax base erosion. That is, the relationship between GDP and TTR presents a N shaped relationship. However, this relationship does not exist between indirect tax tax rate threshold. On the other hand, with increase in GDP, indirect tax revenue increases also.