Tax Effort in Developing Countries: Where is Sri Lanka?

This paper investigates the problem of the declining tax/gross domestic product (GDP) ratio in Sri Lanka by estimating the tax efforts of lower-middle-income countries (LMICs). Using a panel data set from 1990-2014 with two stochastic frontier models, we reveal that Sri Lanka’s tax effort declined during that period. Although the two different stochastic frontier analysis(SFA) models used in this paper produce different tax effort estimates, both models show a decline in tax effort in Sri Lanka. Estimations of personal income tax using available microlevel income data reiterate the low level of tax effort in Sri Lanka at present. We further analyze reasons for the weak tax effort in Sri Lanka and propose appropriate policy recommendations.