Tax effort is an index measure of how well a country is doing in terms of tax collection, relative to what could be reasonably expected given its economic potential. It is a ratio that, by construction, is always positive. Tax effort is calculated by dividing its actual tax share by an estimate of how much tax the country should be able to collect given the structural characteristics of its economy. Studies identify the general level of economic development of a country, its openness to trade and the relative importance of agriculture in domestic production, as the key characteristics bearing on a developing country’s ability to collect taxes, and thus its tax share. Empirically, these characteristics are captured respectively by per capita income, the ratio of trade to GDP, and the share of agriculture to GDP.

The tax share is expected to increase with GDP and the share of foreign trade; it decreases with the share of agriculture. Low-income, predominantly rural, land-locked countries tend to have a lower tax share than upper-middle income, coastal and significantly industrialised countries. The larger the agricultural share in an economy the lower the tax share is likely to be due to the difficulty of taxing agriculture directly and the relatively low level of monetisation in the agricultural sector (Aguirre et al., 1981). However, a large industrial sector implies a higher tax share since this sector is typically well-organised, highly monetised and relatively easy to tax in comparison to the agricultural sector (Bird et al., 2004). Comparisons based on tax effort are considered superior to those relying on tax shares because they take into account the way in which each country exploits its tax potential (Piancastelli, 2001). A high tax effort ratio, above one, indicates that the country is collecting more taxes than predicted by the structural characteristics of its economy. A low tax effort ratio, below one, indicates that the country is collecting less tax than predicted. A tax effort about one means that tax collection is as expected from structural characteristics.

Tax effort is calculated in this report for 42 African countries. The Outlook takes the position that whether or not a country is an oil producer influences its tax potential and should be taken into consideration. Therefore, two measures of tax effort have been computed. The two sets of results are illustrated in Figure 16. The first measure of tax effort is based on the country’s tax share including possible resource-related tax revenues. The second measure is based on an adjusted tax share that excludes this type of tax revenue. Regardless of which set of tax effort is used, a wide range of tax effort is observed, from about 50% up to 250%-300%. In other words, some countries collect as little as half of what they would be expected to while others collect up to 2 to 3 times what they would be expected to. Twenty-four countries have a tax effort index (including resource-related tax revenues) higher than 1. Eighteen countries have indices lower than 1.

Figure 16 also shows that for some countries, the measure of tax effort is unaffected by whether resource-related tax revenues are taken into account or excluded. Ghana, Lesotho, Liberia, and Swaziland display a high tax effort regardless of the measure. Other countries like Guinea, Madagascar and Mauritius have a low tax effort according to both sets of estimates. But there is also a group of countries that switch from low to high when including resource-related tax revenues. This group of countries is formed by Algeria, Angola, Congo, Equatorial Guinea and Nigeria. The case of Chad is a striking example, showing a relatively low tax effort getting even lower when leaving aside oil tax revenue.

Table 1 summarises the two sets of results for countries whose tax efforts most noticeably differ from one set of estimates to the other. Estimates of tax effort for some resource-rich countries turn out to be quite sensitive to whether resource-related tax revenues are considered or not. Tax effort can be counter-intuitive when including resource-related tax revenues. It is questionable how much “effort” needs to be made to tax natural resource extraction as opposed to more politically onerous sources of taxes such as consumption, wages, and profits on ordinary types of activities.

Whereas the trend in tax shares in Africa is encouraging, it has mostly been driven by taxes on resource extraction activities. It may hide the fact that most African countries can further stimulate other types of taxes. Indeed, using the tax effort measure that excludes resource-related tax revenues is revealing: several countries collecting relatively modest levels of tax are actually doing quite well in terms of tax effort. This means that governments in those countries ask citizens and firms for a much higher contribution to the national tax effort than they do in most resource-rich countries. These include Burkina Faso, Ethiopia, Rwanda, Tanzania and Uganda. In sum, oil producing countries are primarily driving the remarkable quantitative rise in average tax shares across the continent, while non-oil producers have made the most progress in broadening the tax base.