Determinants of Tax Revenue and Estimation of Tax Effort Trend in Iran

The significance of tax revenue as the primary source of government finance underscores the importance of accurately measuring tax efforts using unbiased methodologies. This study employs a state-space model and the Kalman filter algorithm to estimate tax effort as an unobservable variable within the tax revenue equation in Iran from 1970 to 2021.The findings reveal a nuanced relationship between various factors and the tax ratio. Per capita income exhibits a positive impact, while the agriculture share in GDP exerts a negative influence. Interestingly, the coefficients of openness and monetization initially have negative elasticity but transition to positive after reaching a certain threshold, indicating a dynamic relationship with the tax ratio. Conversely, the services and industry share in GDP demonstrate a positive effect on the tax ratio before reaching a peak, after which their squared coefficients turn negative.Tax effort in Iran, throughout the studied period, has never been more than 0.25 highlighting a significant disparity between actual and potential tax revenue and underscores inefficiencies within the tax system.