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September 18, 2025Open Access

Tax effort and capacity in developing countries: Unravelling the impact of the informal economy

Key Points

Tax effort is negatively affected by the informal economy and related institutions, hindering economic growth.
Key results indicate that enhancing governance around the informal economy can improve revenue mobilisation efforts.
The study utilizes the Stochastic Frontier technique to assess tax capacity and effort from 2000 to 2021 across multiple countries.
Findings recommend reforms for fiscal responsibility to address budgetary imbalances and enhance tax mobilisation.

Abstract

This study focuses on estimating the tax effort in 25 selected African countries and its implications on economic development. It aims to assess the extent to which a country's tax mobilisation is constrained by the informal structure of the economy. A unique aspect of this study is its tracking of tax effort and tax capacity at an aggregate level, while also relating tax revenue and revenue potential to the informal economy, using Stochastic Frontier technique and panel data spanning 2000–21. Comparing tax effort across countries offers vital insights into appropriate tax solutions for addressing budgetary imbalances. Key results show that informal economy and institutions have a negative effect on tax effort. The findings highlight the significance of improving governance related to the informal economy in enhancing revenue mobilisation. Furthermore, the study offers insights into fiscal behavioural patterns across African economies and recommends necessary reforms for fiscal responsibility.

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