ABSTRACT
This chapter uses a stylised model of government decision-making to clarify the conceptual and quantitative meaning of ‘tax effort’. It discusses the interaction between supply and demand influences on the tax ratio. The chapter presents a simple aggregative model for analysing this interaction. It applies this model to an evaluation of the regression approach to tax effort comparisons, and examines an additional measurement problem arising from the choice of functional form. Tax effort should be related to the optimal allocation of resources between the public and private sectors, inclusive of tax cost considerations. The futility of trying to separate capacity from effort through a single equation model emerges in many of the discussions about the choice of independent variables.
