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This article aims to analyze the fiscal potential of UEMOA member countries. The question of the fiscal potential of the states is of great importance since the domestic resources represent a high proportion in the financing in Plans and strategies of economic and social development. In this article, we adopt the technique of stochastic border estimation, which is more intuitive—and potentially more relevant for policies—to measure the potential and fiscal effort over the period 1990-2017. The results show that the tax burden is determined by structural factors and that, in most countries, the tax potential is underutilized. Similarly, the fiscal effort shows poor performance in terms of resource mobilization in the majority of countries. These results show that the WAEMU countries can reach or exceed the tax rate of 20% minimum set by the UEMOA if efforts are made to better tax the informal sector. The main contributions of this article have been to justify empirically the increase of the minimum pressure rate in the UEMOA from 17% to 20% and to demonstrate that a better taxation of the agricultural sector would considerably affect the mobilization of tax revenues.

The financing of economies requires the mobilization of both external and mostly internal resources as recommended by the 2002 Monterrey Consensus on Financing for Development. However, fifteen years after this International Conference, the countries of the West African Economic and Monetary Union (WAEMU), like many developing countries, are still struggling to ensure effective mobilization of domestic resources. Indeed, the observation is that the development financing strategies of UEMOA countries were based on a strong mobilization of domestic resources. However, in fact it is public aid for development, multilateral or bilateral debt and foreign direct investment that finance the levers of structural transformation.

In addition, the analysis of budget deficits in the WAEMU countries yields mixed results. According to the 2017 Macroeconomic Convergence Report of the Economic Community of West African States (ECOWAS), the WAEMU budget deficit decreased to 4.1% of GDP in 2017, compared with 4.3 in 2016, reflecting the increase in revenue and the moderation of recurrent expenditures, offsetting the increase in capital expenditures and other recurrent expenditures. Thus, in WAEMU in 2017, total revenue grew by 7.1% to 17.8% of GDP, driven mainly by tax revenues, up 7.7%. The increase in tax revenues is linked to continued efforts in tax administration, computerization of procedures and the fight against fraud. However, the tax pressure rate stood at 15.3% in 2017 against 15.4% in 2016. Hence the question of the effectiveness of the mobilization of fiscal or non-fiscal resources arises.

According to Culpeper and Bhushan [

Nearly a decade after the adoption of the decision no. 34/2009/CM/UEMOA of December 17, 2009 adopting the criteria and indicators of the fiscal transition within WAEMU, the analysis of the stylized facts of the principal criteria, including the tax burden ratio and the share of domestic revenue in total revenues, show weak performance in several member countries. Indeed, the tax pressure in the WAEMU is very disparate, and was for example in 2017, 13.3% in Benin, 16.5% in Burkina Faso, 15.5% in Côte d’Ivoire, 10.4% in Guinea-Bissau, 15.1% in Mali, 13.1% in Niger, 15.0% in Senegal and 20.6% in Togo.

As a result, countries need to implement economic policies that respond effectively to development challenges if they want to substantially reduce poverty. Under these conditions, the fiscal policy that appears as the set of decisions and characteristic orientations of a tax system should make it possible to finance public expenditure while supporting economic activity. However, it appears from the economic actors (the companies), that taxation is perceived as an unbearable burden; this could discourage investment or even any economic activity as suggested by the Laffer curve. Thus, the concern of optimal collection of taxes must reconcile the financing of public expenditures and the development of the private sector, main sources of growth and creators of wealth and jobs in modern economies.

Starting from this principle, knowledge of the tax potential makes it possible to guide choices and implement appropriate policies. According to Brun et al. [

The main objective of this article is to analyze the fiscal potential of the WAEMU countries. Specifically, this involves, on the one hand, empirically identify the factors that can influence the tax potential and, on the other hand, evaluate the tax effort.

The first contribution of this research was to show that raising the minimum community tax rate in the WAEMU from 17% to 20% in 2015 is justified empirically, but that the countries of the Union taken as a whole can’t reach and even exceed this minimum threshold because of the structure of the economies.

The second contribution of this study was to demonstrate that for all the WAEMU countries, agriculture contributes very little and even negatively to tax revenues, with the exception of Togo where its contribution is significant and high. Thus, the knowledge of the potential and the control of the informal sector’s base is one of the major challenges of these countries because it is a cost for the State especially in terms of mobilizing tax revenues even if it participates in jobs creation and domestic production.

The rest of the article is organized as follows: after an overview of the economic literature devoted to the evaluation of the fiscal potential, some stylized facts of the revenue mobilization in the WAEMU will be the subject of section 3, the methodology will be presented in Section 4, Section 5 will be devoted to the presentation and discussion of results.

Domestic financing of the important basic infrastructure needs of developing countries has been advocated on several occasions for its stability, but also because of the declining trend in public aid for development. It is within this framework that the question of the evaluation of the fiscal potential has found renewed importance in the economic literature, especially in developing countries. In this paper, we define the tax potential as the maximum amount of tax revenue that a country could reasonably generate at a given point in time in relation to the structural characteristics of its economy. The tax potential is inherently unobservable―but can be estimated empirically. The tax effort is the extent to which actual tax revenues reach the estimated capacity. It is expressed here in proportion. This effort reflects on the one hand the political choices and the inefficiency in the application of the policies on the other hand. Macroeconomic work in particular covers a variety of fields, including the determinants of fiscal resources and the question of the potential and the fiscal effort of an economy.

In the theoretical literature, several models [

The modern theory of optimal taxation and fiscal potential is based on the founding work of Mirrlees [

Laffer’s model [

Saez [

Indeed, a functional tax system requires a minimum threshold of tax pressure in order not to cause distortions in economic activity and to create inequalities because there is a positive link between the taxpayers’ ability to pay and the level of production. Indeed, there is a positive relationship between the tax levy and the level of industrialization and therefore the level of development. In addition, the inequity in the distribution of the tax burden is a second limit to the increase of the tax pressure. For example, the highly developed informal sector creates distortions in the system and makes it non-consensual. It is the same for tax evasion, which tend to make the tax burden supported by some taxpayers.

Ultimately, the mobilization of tax revenues depends on structural factors relating to each country. Therefore, for an effective fiscal policy, the authorities must define it according to the chosen economic and social development strategy. It must be supported by a fair, flexible and responsive tax system and must aim for the achievement of clear, coherent and precise objectives. For Bousselhami and Hamzaoui [

In the dynamic of tax revenue mobilization many empirical works have been realized. This work has analyzed and found controversial results on the link between the tax rate and the level of tax revenues on the one hand and the tax pressure on economic growth on the other.

The analysis of this empirical literature reveals rich teachings on the determinants of public revenues and more precisely the fiscal potential. Thus, following Barro [

Branson and Lovell [

Brun et al. [

This is also valid in the case of Côte d’Ivoire where Keho [

Moreover, in an analysis of Benin’s fiscal potential, based on a stochastic border model, Senou [

Saibu [

Amgain [

Bousselhami et al. [

Moreover, the fundamental difference in most of the work is in the methodological approach. This led Brun et al. [

To get around this methodological difficulty, Stotsky and Woldmariam [

In contrast, in this paper we adopt stochastic frontier analysis techniques, which support a more intuitive―and potentially more policy-relevant―measure of tax potential and effort. Stochastic frontier analysis can be used to generate a stochastic tax frontier, which defines an estimated maximum potential tax-to-GDP ratio for a given set of determinant “inputs” and environmental factors.

In the contemporary economic literature, the two methods of assessing the fiscal potential found are based mainly on estimates based on panel data. The first method of valuation consists in estimating an equation of the tax revenue ratio according to a set of variables considered as determining. The ratio predicted by the regression is the fiscal potential and the remainder of the equation represents the tax effort [

The models used in estimating tax potential are part of the empirical studies on the determinants of tax revenues. Several models are presented in studies that try to show the position of the key structural variables among the others suggested by the literature. The approach adopted in this study is inspired is inspired by the stochastic frontier model developed by Aigner, Lovell and Schmidt [

Y i t = f ( X i t , β ) + ε i t (1)

with ε i t = ϑ i t − μ i t .

Y i t represents the tax levy rate (Prefisc); X i t the vector of explanatory variables, β the parameters to estimate, and ε i t the error term decomposed in ϑ i t the white noise of the regression and μ i t the term of ineffectiveness.

Following a linearization of the equation we obtain:

Y i t = β 0 + ∑ i = 1 k β i X i t + ϑ i t − μ i t (2)

We can deduce:

P r e s f i s c i t = β 0 + ∑ i = 1 k β i X i t + ϑ i t − μ i t (3)

The stochastic frontier technique gives the maximum level of revenue that can be recovered by the economy given its different characteristics. The origin of this method comes from Farrel’s [

The variables used in the literature for potential analysis are diverse. For our study we retain those frequently used in studies.

The tax pressure variable (TXP) represents the share of tax revenue in GDP. It is an indicator of revenue mobilization. It is used in this study as a dependent variable to predict the fiscal potential of countries.

The GDP per capita variable (GDPCAP) is a structural variable that reflects the level of income and then used to approximate the level of development of the economy. Brun et al. [

The degree of openness (DOPEN) makes it possible to know whether the foreign exchanges are favorable to the tax levy. In addition, this variable is positively influenced by the fact that international transactions are easier to tax and more important for the developing country [

The degree of monetization measured by the ratio M2/GDP allows us to examine the relationship between the level of financial transactions and the tax levy. Broad money (as a share of GDP) has a significant positive effect on the fiscal potential, suggesting that a highly monetized economy would mobilize more tax revenue than a less monetized one.

Agricultural Added Value (AVGRI) is the share of agriculture in the economy. However, the agricultural sector is difficult to tax because of many unrecorded activities [

The data used are drawn from the databases of the World Development Indicators (WDI) [

For our analysis, we will use the panel estimation techniques. First, we performed the preliminary tests of unit root tests and the cointegration test.

Subsequently, we estimate the stochastic border model of the sampling rate (Equation (4)):

P r e s f i s c i t = β 0 + ∑ i = 1 k β i X i t + ϑ i t − μ i t (4)

Variables | Definitions | Formula | Source |
---|---|---|---|

TXP | Tax revenue on the GDP | Tax revenue/GDP | CBWAS |

GDPCAP | Logarithm of GDP per capita | Log (GDP/inhabitant) | WDI |

DOPEN | The degree of openness | (Import + Export)/GDP | WDI |

AVGRI | Agricultural added value in GDP | AV Agricultural/GDP | WDI |

M2/GDP | Money supply relative to GDP | M2/PIB | WDI |

The dependent variable is the tax rate. Vector X groups together the structural determinants of the tax pressure used in this study: the log of GDP per capita, agricultural added value, the rate of trade openness and the degree of monetization.

Equation (4) thus estimated represents the tax pressure model. Then, we determine the optimal tax rate (or fiscal potential), which is the predicted value of the dependent variable.

The stationarity tests are prior to the analysis of the estimates in panel data in order to avoid false regressions in case of presence of unit root. In order to make a rigorous analysis, we will use two types of tests namely that of Im, Pesaran and Shin et al. [

The results of these tests recorded in

This section presents the main results of the econometric estimations and makes an analysis between the optimal tax pressure and that observed in order to formulate economic policy recommendations to the WAEMU countries.

West African tax systems are characterized by a very low level of domestic levy, a very strong pressure on door taxation and also by the unequal distribution of their burden on the income of taxpayers. In the WAEMU, duties and taxes on imports and exports represents on average one-quarter (24%) of tax revenues, although with large disparities between countries. Direct taxes, consisting of taxes on corporations and individuals, remain the weak point in the mobilization of tax.

LLC | IPS Decision | |||
---|---|---|---|---|

Level | Difference | Level | Difference | |

TXP | −7.36 (0.00) | - | −1.99 (0.02) | −I(0) |

GDPCAP | −7.12 (0.00) | −13.42 (0.00) | −1.24 (0.11) | −7.26I(1) (0.00) |

DOPEN | −5.43 (0.47) | −11.91 (0.00) | −0.49 (0.31) | −5.98I(1) (0.00) |

AVGRI | −6.40 (0.03) | −14.12 (0.00) | −0.91 (0.18) | −8.15I(1) (0.00) |

M2/GDP | −4.90 (0.16) | −12.76 (0.00) | 1.34 (0.91) | −6.43I(1) (0.00) |

Source: Author, Notes: (...) probability.

In this dynamic (

The analysis of the

In general, tax issues in the WAEMU (

Thus,

In terms of tax revenue mobilization, it seems that in the WAEMU countries, despite the efforts made to ensure the balance of the macroeconomic framework, there are other issues that hinder the process of mobilizing domestic resources, particularly the informal sector quite developed, the weight of tax exemptions in the agricultural sector and illicit financial flows.

Given these results, it is wise for the WAEMU economies to know their fiscal potential to identify the best economic policies to implement to increase efficiency in revenue mobilization or reduce the tax burden, sources of undesirable and counterproductive social effects.

The descriptive statistics of the variables, presented in

In fact, agriculture, essentially informal, occupies an important place in the economies of these countries with an average added value of 32.19% of GDP, over the period 1990-2017. This sector escapes the tax administration, and can

Variable | Obs | Mean | Std. Dev. | Max | Min |
---|---|---|---|---|---|

Tax pressure | 224 | 12.54 | 4.24 | 23.09 | 1.16 |

GDP per capita | 224 | 278,186 | 163,841 | 967,699 | 8 103 |

Agricultural added value | 224 | 32.19 | 9.96 | 61.42 | 11.88 |

Degree of openness | 224 | 60.66 | 17.82 | 125.03 | 28.37 |

Degree of monetization | 224 | 26.40 | 9.71 | 68.87 | 6.55 |

Source: Author.

partly justify the poor fiscal performance of the countries of the union. In addition, GDP per capita, which is an indicator of the level of development, remained low with an average of 278,186 FCFA over the period. The degree of monetization measured by the ratio M2 on GDP, and the degree of commercial openness are, on average, 26.4 and 60.6 respectively as a percentage of GDP.

As a result of the preliminary tests, we can therefore estimate the fiscal potential according to the following model:

TXP i t = β 0 + β 1 GDPCAP i t + β 2 DOPEN i t + β 3 AVAGRI i t + β 3 M 2 / GDP i t + ϑ i t − μ i t

The estimation of the tax potential allows us to measure the impact of structural factors on the tax pressure.

u i t = exp { − η ( t − T ) i } u i

when η > 0 , the degree of inefficiency decreases with time; when the degree of efficiency increases over time.

The total variance ( σ 2 ) is significantly different from 0 at the 1% threshold. The variance of the inefficiency component is equal to: σ μ 2 = γ σ 2 = 0.235 and that of the pure random component is: σ s 2 = σ 2 − σ μ 2 = 1.886 . This means that the tax differences observed in relation to the fiscal frontier are due not only to technical inefficiency but also to the pure random component. The stochastic frontier model is therefore more suitable than the deterministic model. Moreover, the differences are mainly explained by the pure random component ( δ s 2 > δ μ 2 ) . Finally, η > 0 , highlights the decay over time of the degree of inefficiency in the mobilization of fiscal resources in the WAEMU countries.

The results show that per capita GDP positively and significantly influences

Explanatory Variables | Dependent Variable (Tax Pressure) |
---|---|

Border | |

Real GDP per capita | 3.436** (1.559) |

Agricultural Added Value (% of GDP) | −0.0738* (0.041) |

Commercial opening | −0.0479** (0.022) |

Money supply (M2 as a % of GDP) | 0.0069 (0.029) |

Constant | 19.66*** (1.477) |

Inefficiency | |

Sigma square (δ^{2}) | 2.121*** (0.325) |

Gamma (γ) | 0.111 (0.619) |

Mu (μ) | 4.449*** (1.630) |

Eta (η) | 0.0334*** (0.006) |

Observations | 216 |

Number of countries | 8 |

Log likelihood | −471.66 |

Wald chi2(4) | 12.05 (0.017) |

Standard errors in parentheses ***p < 0.01, ** p < 0.05, * p < 0.1. Source: Author.

the tax pressure. The degree of trade openness and agricultural added value have a significantly negative influence. More specifically, a 1 percentage point increase in the Real GDP per capita leads to an increase in the tax pressure of 3.4 percentage points, while the increase in the degree of trade openness and the agricultural added value of a unit decrease the tax pressure respectively by 0.07 and 0.04.

The added value of agriculture as a surrogate for the ease of tax collection has a negative and significant effect, which is explained by the fact that in most countries agriculture is tax-exempt and very informal. The share of the agricultural sector is estimated at about 32.19% over the period in the sub region, and is growing more in the informal sector. Most of the actors come from rural areas where fiscal knowledge is lacking. This sector therefore requires a reorganization to facilitate its imposition. The negative sign associated with trade opening is certainly unexpected but can be justified by a fiscal transition with a decline trend in door tax revenues.

The effect of the change in the share of M2 money supply in GDP on the tax pressure is not significant. Thus, the degree of monetarization of the economy does not affect the ability of states to mobilize more resources. The result is contrary to the Karagoz [

This section makes a robustness analysis using other structural variables (informal sector share and industrial added value). The share of the informal sector is extracted from the Medina and Schneider base [

The results are shown in

The results are largely consistent with the variables. Thus, the degree of monetization (M2), product per capita and industrial added value positively influence the tax pressure while the degree of trade openness has a negative impact. Like agricultural added value, the share of the informal sector negatively influences, but not significantly, the tax pressure in the WAEMU countries.

In fact, the informal sector occupies a large part of the population in the WAEMU area, with a contribution to GDP estimated at an average of 41.37% over the period. This importance of the informal sector is a constraint in the

Explanatory Variables | Dependent variable (Tax Pressure) |
---|---|

Border | |

Real GDP per capita | 3.507* (1.791) |

Industrial Added Value (% GDP) | 0.0196 (0.0747) |

Commercial opening | −0.0395* (0.0238) |

Money supply (M2 as a % of GDP ) | 0.0505 (0.0489) |

Share of the informal sector (% GDP) | −0.0464 (0.0709) |

Constant | 18.61*** (1.360) |

Inefficiency | |

Sigma carré (δ^{2}) Gamma (γ) Mu (μ) Eta (η) | 2.120*** (0.392) 0.306 (0.686) 3.786** (1.682) 0.0383*** (0.00697) |

Observations | 192 |

Number of Pays Log likelihood | 8 −410.65 |

Standard errors in parentheses ***p < 0.01, **p < 0.05, *p < 0.1. Source: Author.

mobilization of fiscal resources because many activities are outside the tax administration. Reforms are necessary to bring the various actors to migrate to the formal.

As a result of our estimates, we determine the tax potential as the predicted level of the levy and the trends are observed in

The analysis of the evolution of the tax pressure and the potential shows characteristic facts about the WAEMU economies. Indeed,

Niger and Togo are the countries that have made an exception and are those that have, during the period 1990-2017, respected the 20% community norm in terms of taxation recommended by WAEMU. This can be justified by the introduction of the tax reforms harmonized by these countries and by an economic situation resistant to the various external shocks. Among other things, the countries of the Union are making efforts but are generally confronted with a vast informal sector which is largely exempt from taxation. Also, there are recessions caused by instability in each country and dependence on external resources including public aid for development.

The analysis of the tax effort reflects the actual level of levy compared to the potential levy. We use the effective tax pressure, expressed as a percentage of the contributive capacity as a measure of fiscal effort, as demonstrated by Kumbhaker and Lovell [

In addition, through

The mobilization of tax revenues is one of the most pressing challenges facing the countries of the West African Economic and Monetary Union (WAEMU). In fact, tax revenues are a major factor in the development strategies of these countries and, especially in economic life, in the effective provision of public

COUNTRY | Average over the period 1990-2017 | ||
---|---|---|---|

Fiscal pressure | Fiscal potential | Fiscal effort | |

Benin | 13.13 | 19.82 | 0.66 |

Burkina | 12.01 | 19.79 | 0.61 |

Côte d'Ivoire | 15.20 | 19.88 | 0.76 |

Guinea-Bissau | 5.32 | 20.15 | 0.27 |

Mali | 12.76 | 19.84 | 0.64 |

Niger | 11.87 | 19.74 | 0.60 |

Senegal | 16.24 | 19.78 | 0.82 |

Togo | 14.26 | 19.74 | 0.72 |

Source: Author.

services. However, a very high level of tax pressure discourages taxpayers and leads to economic distortions.

Thus, the stylized facts show that, despite the efforts of the States in terms of tax revenue mobilization, WAEMU remains the sub-region where the revenue/GDP ratio remains the lowest. Therefore, the issue of tax revenue mobilization within the WAEMU zone was the subject of our analysis in this article, based on the structural factors of tax mobilization.

Using a stochastic border model as a panel, our estimates highlight the assessment of the fiscal potential and the role played by structural factors. The results show that the level of development has a positive and significant effect on the tax pressure, while the share of agricultural added value and trade opening has a negative and significant effect. Moreover, the tax potential varies according to the country and the Community standard is not respected on average by all countries over the period concerned. The same is true of the effort made to mobilize resources, even though Niger and Togo are showing very appreciable results over the last few years.

Therefore, the improvement of fiscal resources within the WAEMU zone is a process designed to design, with a community-specific levy system and defined according to the economic and social development strategy in order to be able to collect taxes from the WAEMU zone. In addition, the agricultural added value that significantly and negatively affects the fiscal potential, as this sector escapes taxation (exemption), as well as climatic hazards. Finally, to benefit from the advantages of trade openness and to face international competition, the countries of the zone must intensify efforts in their process of industrialization by micro-industries, to reorient industrial policy.

Two main contributions can be selected from this research. First, this research has shown that raising the minimum tax pressure rate from 17% to 20% in the WAEMU in 2015 is empirically valid. Moreover, the analysis shows that the countries of the Union as a whole cannot reach or even exceed this minimum threshold in view of the structural characteristics of the economies of the Union. Secondly, this study has shown that for all WAEMU countries, agriculture contributes very little and even negatively to tax revenues, except in Togo where its contribution is strong with a tax ratio (51.4%). In the end, it is fundamental to consider, from the empirical results, two lines of research to improve this study among others. This is on the one hand the evaluation of informal GDP and introduces it into the model in order to obtain more robust results. On the other hand, this research could be improved by integrating measures of inequality, well-being of individuals and distribution of their income through a computable general equilibrium model.

The author declares no conflicts of interest regarding the publication of this paper.

Kobyagda, I.L. (2019) Macroeconomic Determinants of the Mobilization of Tax Revenues of the Countries of the West African Economic and Monetary Union (WAEMU). Modern Economy, 10, 237-260. https://doi.org/10.4236/me.2019.101017

Tax pressure, tax potential and tax gap in the WAEMU countries from 1991 to 2017