The Study of Factors Involved in Tax Effort and a Proposal for Designing a System Dynamics Approach to Tax Effort in Iran

Tax effort shows the percentage of nominal tax revenues being realized. In other words, the difference between the nominal and the realized tax bases indicates the tax effort and if the nominal tax base equals the realized, then we can say that a full tax effort has occurred. Both the economic literature and the empirical studies have considered the tax to national income ratio as the tax effort. Variables determining tax effort are classified into two categories (Bird, 2002): First, supply-side variables which are being used in most traditional studies including such variables as per capita income, share of value added of the agriculture sector, inflation, openness of the economy, and the extent to which tax collection authorities make efforts. Second, demand-side variables which explain the roles of social institutions and emphasize on the citizen's inherent motives and people's attitudes towards making use of benefits of paying taxes. The most important demand-side variables are tax morality, shadow economy, tax evasion and income distribution inequalities. In this paper, two methods have been used to study tax effort. The first is the econometrics method which has been used in most domestic and foreign studies. In this method, a part of demand-side variables such as per capita income, share of value added of the agriculture sector, inflation, and population growth is taken into account and after estimating the model, the tax effort exerted is measured in respect to taxes on consumption, wealth, business income, and corporate income both in the whole country and in the seven provinces of Tehran, Guilan, East Azerbaijan, Khorassan, Isfahan, Khouzestan, and Fars. But as for the second method, namely, the "system dynamics approach", the preliminaries of designing a model have been mentioned and the advantages thereof have been described. This method resolves the shortcomings of econometrical models and is able to make use of most of supply-side and demand-side variables and as such, it can eventually be used in forecasting tax revenues.