Impact of Tax Simplification on Tax Efficiency

Abstract

Tax simplification always has been on the agenda of policymakers to increase the efficiency of tax systems. Less complex taxes can contribute to higher tax revenues with minimum negative distortions to economies. Therefore, the link between tax simplification and tax efficiency is even more relevant now for policymakers in the era of high government budget deficits. The aim of this paper is to explain the empirical study of this important link in a panel setting, which is considerably limited in the literature. The findings of the paper place numerical values on the impact of tax simplification on the effectiveness of tax collection systems. Tax efficiency is measured by tax efforts which are introduced through two alternative measures: a traditional regression approach and a stochastic frontier analysis. Tax simplification is measured by Time to Comply and Number of Payments from the “Doing Business Database”. The paper investigates both direct and indirect links between tax simplification and efforts. The indirect link, introducing a kind of transmission mechanism, works through changing values of tax corruption associated with adjustments in tax complexity. The tax corruption indicator is generated from the Enterprise Surveys Database. The panel dataset includes 104 developed and developing countries and covers the years from 2002 to 2016.