Skip to main content
SpringerLink
Log in

Taxation and Public Spending Efficiency: An International Comparison

  • Published:
Comparative Economic Studies Aims and scope Submit manuscript

Abstract

This paper evaluates the relevance of taxation for public spending efficiency in a sample of OECD economies for the period of 2003–2017. We start by computing the data envelopment analysis (DEA) scores, and then we evaluate the role of tax structure in explaining these public efficiency scores, using a reduced-form panel data regression specification. Our main findings are as follows: inputs could be theoretically lower by approximately 32–34% and expenditure efficiency is negatively associated with taxation. More specifically, direct and indirect taxes negatively affect government efficiency performance, and the same is true for social security contributions.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

AUS—Australia, AUT—Austria, BEL—Belgium, CAN—Canada, CHE—Switzerland, CHL—Chile, CZE—Czech Republic, DEU—Germany, DNK—Denmark, ESP—Spain, EST—Estonia, FIN—Finland, FRA – France, GBR—United Kingdom, GRC—Greece, HUN—Hungary, IRL—Ireland, ISL—Iceland, ISR—Israel, ITA—Italy, JPN—Japan, KOR—South Korea, LTU—Lithuania, LUX—Luxembourg, LVA—Latvia, MEX—Mexico, NLD—Netherlands, NOR—Norway, NZL—New Zealand, POL—Poland, PRT—Portugal, SVK—Slovak Republic, SVN—Slovenia, SWE—Sweden, TUR—Turkey, USA—United States of America

Fig. 2

Similar content being viewed by others

Notes

  1. Several parametric and nonparametric methodologies have been used to compute technical efficiency. Parametric approaches include corrected ordinary least squares and stochastic frontier analysis (SFA). Among the nonparametric techniques, both data envelopment analysis (DEA) and free disposal hull (FDH) have been widely applied in the literature.

  2. DEA is a nonparametric frontier methodology, which draws from Farrell’s (1957) seminal work and was further developed by Charnes et al. (1978). Coelli et al. (2002) and Thanassoulis (2001) offer introductions to DEA.

  3. The 36 OECD member countries are: Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, the UK, and the USA.

  4. This is the equivalent envelopment form (see Charnes et al. 1978), using the duality property of the multiplier form of the original model.

  5. For detailed information on the construction of this data, see Prichard et al. (2014) and McNabb (2017).

  6. In other words, direct taxes include taxes on income, profits and capitals gains, taxes on payroll and workforce, and taxes on property. The total value of direct taxes may sometimes exceed the sum of these sub-components, owing to revenue that is unclassified among these sub-components.

  7. Taxes may sometimes exceed the sum of individuals and corporations taxes, due to revenues that are unallocated between the two.

  8. This variable is always exclusive of resource revenues in available sources.

  9. This variable is entirely distinct from social contributions, though in underlying sources social contributions are very occasionally reported as payroll taxes.

  10. We also included other variables which include institutional controls (checks and balances, measures of democratic quality) and proxies of human capital (number of years of schooling, attainment and completion rates at the secondary school level); however, none of them yielded significant results. In addition, data availability constrained the sample further resulting in the reduction of the total number of observations. Consequently, we decided to leave these out.

References

  • Acosta-Ormaechea, S., S. Sola, and J. Yoo. 2019. Tax composition and growth: A broad cross-country perspective. German Economic Review 20(4): 70–106.

    Article  Google Scholar 

  • Adam, A., M. Delis, and P. Kammas. 2011. Public sector efficiency: Levelling the playing field between OECD countries. Public Choice 146(1–2): 163–183.

    Article  Google Scholar 

  • Afonso, A., and V. Gaspar. 2007. Dupuit, Pigou and cost of inefficiency in public services provision. Public Choice 132(3–4): 485–502.

    Article  Google Scholar 

  • Afonso, A., and M. Kazemi. 2017. Assessing public spending efficiency in 20 OECD countries. In Inequality and finance in macrodynamics (dynamic modeling and econometrics in economics and finance), ed. B. Bökemeier and A. Greiner. Springer.

    Google Scholar 

  • Afonso, A., Romero, A., and Monsalve, E. 2013. Public Sector Efficiency: Evidence for Latin America. IADB Discussion Paper IDB-DP-279.

  • Afonso, A., and L. Schuknecht. 2019. How “Big” should government be? Economics and Business Letters 8(2): 84–95.

    Article  Google Scholar 

  • Afonso, A., L. Schuknecht, and V. Tanzi. 2005. Public sector efficiency: An international comparison. Public Choice 123(3–4): 321–347.

    Article  Google Scholar 

  • Afonso, A., L. Schuknecht, and V. Tanzi. 2010. Public sector efficiency: Evidence for new EU member states and emerging markets. Applied Economics 42(17): 2147–2164.

    Article  Google Scholar 

  • Afonso, A., Schuknecht, L., and Tanzi, V. 2020. The Size of Government. EconPol Working Paper 46, June 2020.

  • Afonso, A., and M. St. Aubyn. 2006. Cross-country efficiency of secondary education provision: A semi-parametric analysis with non-discretionary inputs. Economic Modelling 23(3): 476–491.

    Article  Google Scholar 

  • Antonelli, M., and de Bonis, V. 2019. The efficiency of social public expenditure in European countries: A two-stage analysis. Applied Economics (forthcoming).

  • Arnold, J., B. Brys, C. Heady, A. Johansson, C. Schwellnus, and L. Vartia. 2011. Tax policy for economic recovery and growth. The Economic Journal 121(550): 59–80.

    Article  Google Scholar 

  • Auerbach, A.J., and K. Hassett. 1992. Tax policy and business fixed investment. Journal of Public Economics 47: 141–170.

    Article  Google Scholar 

  • Boadway, R., M. Marchand, and P. Pestieau. 1994. Towards a theory of the direct–indirect tax mix. Journal of Public Economics 55(1): 71–88.

    Article  Google Scholar 

  • Chan, S.-G., Z. Ramly, and M. Karim. 2017. Government spending efficiency on economic growth: Roles of value-added tax. Global Economic Review 46(2): 162–188.

    Article  Google Scholar 

  • Charnes, A., W. Cooper, and E. Rhodes. 1978. Measuring the efficiency of decision making units. European Journal of Operational Research 2: 429–444.

    Article  Google Scholar 

  • Coelli, T., D. Rao, and G. Battese. 2002. An introduction to efficiency and productivity analysis, 6th ed. Kluwer Academic Publishers.

    Google Scholar 

  • Drucker, L., Krill, Z., and Geva, A. 2017. The impact of tax composition on income inequality and economic growth. Ministry of Finance. Publications and Reviews.

  • Dutu, R., and Sicari, P. 2016. Public spending efficiency in the OECD: Benchmarking Health Care, Education and General Administration. OECD Economics Department Working Papers 1278.

  • Farrell, M. 1957. The measurement of productive efficiency. Journal of the Royal Statistical Society Series A (General) 120: 253–281.

    Article  Google Scholar 

  • Grossman, P., P. Mavros, and R. Wassmer. 1999. Public sector technical inefficiency in large U.S. cities. Journal of Urban Economics 46 (2): 278–299.

    Article  Google Scholar 

  • Gupta, S., and M. Verhoeven. 2001. The efficiency of government expenditure—Experiences from Africa. Journal of Policy Modelling 23: 433–467.

    Article  Google Scholar 

  • Hauner, D., and Kyobe, A. 2008. Determinants of Government Efficiency. IMF WP/08/228.

  • Herrera, S., and A. Ouedraogo, A. 2018. Efficiency of Public Spending in Education, Health, and Infrastructure: An International Benchmarking Exercise, World Bank Policy Research Working Paper 8586.

  • ICTD/UNU-WIDER, ‘Government Revenue Dataset’, 2018, https://www.wider.unu.edu/project/government-revenue-dataset'. https://ourworldindata.org/taxation

  • Johansson, Å. 2016. Public finance, economic growth and inequality: A survey of the evidence. OECD Economics Department Working Papers 1346.

  • McNabb, K. 2017. Toward closer cohesion of international tax statistics: The ICTD/UNU-wider GRD 2017”. WIDER Working Paper 2017/184. Helsinki: UNU-WIDER.

  • McNabb, K., and LeMay-Boucher, P. 2014. Tax structures, economic growth and development. ICTD Working Paper 22.

  • Medina, L., and F. Schneider. 2017. Shadow Economies around the World: What did we Learn Over the Last 20 Years? IMF Working Paper 18/17.

  • Prichard, W., Cobham, A., and Goodall, A. 2014. 'The ICTD Government Revenue Dataset', ICTD Working Paper 19.

  • Schneider, F. 2016. Estimating the size of the shadow economies of highly-developed countries: Selected new results. CESifo DICE Report 4/2016 (December).

  • Schuknecht, L. 2020. Public spending and the role of the state. Cambridge University Press.

    Book  Google Scholar 

  • Simar, L., and P. Wilson. 2007. Estimation and Inference in two-stage, semi-parametric models of production processes. Journal of Econometrics 136(1): 31–64.

    Article  Google Scholar 

  • Tanzi, V., and L. Schuknecht. 1997. Reconsidering the fiscal role of government: The international perspective. American Economic Review 87 (2), 164–168.

    Google Scholar 

  • Tanzi, V., and L. Schuknecht. 2000. Public spending in the 20th century: A global perspective. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  • Thanassoulis, E. 2001. Introduction to the theory and application of data envelopment analysis. Kluwer Academic Publishers.

    Book  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Instituto Superior de Economia e Gestão (ISEG), Universidade de Lisboa, Rua do Quelhas 6, 1200-781, Lisbon, Portugal

    António Afonso & Ana Venâncio

  2. REM/UECE, R. Miguel Lupi 20, 1249-078, Lisbon, Portugal

    António Afonso

  3. Research in Economics and Mathematics (REM) and Research Unit on Complexity and Economics (UECE), ISEG, Universidade de Lisboa, Rua Miguel Lupi 20, 1249-078, Lisbon, Portugal

    João Tovar Jalles

  4. Economics for Policy, Nova School of Business and Economics, Universidade Nova de Lisboa, Rua da Holanda 1, 2775-405, Carcavelos, Portugal

    João Tovar Jalles

  5. IPAG Business School, 184 Boulevard Saint-Germain, 75006, Paris, France

    João Tovar Jalles

  6. ADVANCE/CSG, R. Miguel Lupi 20, 1249-078, Lisbon, Portugal

    Ana Venâncio

Authors
  1. António Afonso
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. João Tovar Jalles
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Ana Venâncio
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Ana Venâncio.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

We thank two anonymous referees for their very useful suggestions. The authors acknowledge financial support from FCT – Fundação para a Ciência e Tecnologia (Portugal) and for national funding through research Grants UIDB/05069/2020 and UIDB/04521/2020. The opinions expressed herein are those of the authors and not necessarily those of their employers.

Appendices

Appendix

Appendix 1: Variable Definitions and Sources

See Tables

Table 4 Output components
Full size table

4,

Table 5 Input components
Full size table

5 and

Table 6 Second-stage regression
Full size table

6.

Appendix 2: DEA Efficiency Scores

See Tables

Table 7 Input- and output-oriented DEA VRS efficiency scores for model 0
Full size table

7, 8 and 9.

Table 8 Input- and output-oriented DEA VRS efficiency scores for model 1
Full size table
Table 9 Input- and output-oriented DEA VRS efficiency scores for model 2
Full size table

.

Appendix 3: Second-Stage Regression

See Tables

Table 10 DEA input efficiency scores for model 0
Full size table

10,

Table 11 DEA input efficiency scores for Model 2
Full size table

11 and

Table 12 DEA output efficiency scores for Model 1
Full size table

12.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Afonso, A., Jalles, J.T. & Venâncio, A. Taxation and Public Spending Efficiency: An International Comparison. Comp Econ Stud 63, 356–383 (2021). https://doi.org/10.1057/s41294-021-00147-2

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/s41294-021-00147-2

Keywords

JEL Classification

Search

Navigation