Tax effort: An analysis for the EU countries and Turkey

The fact that countries spend more than their income from taxation often leads to budget deficits. In particular, if the level of income provided by taxation is not sufficient, states resort to borrowing, which they consider to be a source of income. This leads to the legitimation of budget deficits and the sustainability problem, as well as to an increase in the public debt stock, which damages the public finance balance. Such undesirable situations that occur in the public finance balance can cause macroeconomic imbalances in both the short and long term. Therefore, at this point, the ability to collect taxes, which is the main source of financing of public finance, becomes important. Tax effort, defined as the ratio of actual tax revenue to potential tax revenue or capacity, is an important indicator that explains how much a country benefits from its capacity. In order to calculate the tax effort, first of all, it is necessary to calculate the potential tax capacity, and then to rate the actual tax revenue. If the obtained value is equal to one, then the tax capacity is optimally used. However, the value obtained is below or above one, and tax revenue is collected below and above the capacity, respectively. Calculated tax effort values provide an important guide to policy makers about the effectiveness of a country's tax system and taxation process. In this study, tax effort and fiscal effort indices are calculated using data for the period 1995-2020 in a sample consisting of European Union countries and Turkey. According to the obtained tax effort values, the countries with the lowest and highest performance are Germany and Denmark, respectively. In terms of fiscal effort, the countries with the lowest and highest performance are Turkey and Hungary, respectively.