Governance, Fiscal Effort, and Tax Capacity: International Evidence from Comparable Economies

Abstract

Fiscal capacity and tax revenue mobilization are essential for preserving budgetary resilience amid globalization, capital mobility, tax competition, and institutional constraints. While previous studies have examined the determinants of tax performance, relatively few have jointly considered structural factors, governance quality, and fiscal effort within a comparative framework while clearly distinguishing fiscal-effort benchmarking from broader assessments of tax-system performance. This study examines the associations between economic openness, productive structure, institutional quality, tax capacity, and fiscal effort across 30 comparable countries over the period 2000–2023 (720 country-year observations). Tax revenue, gross domestic product per capita, trade openness, industrial value added, and governance indicators are obtained from the World Development Indicators and Worldwide Governance Indicators databases. Fiscal potential is estimated from a two-way fixed-effects panel model; the comparative benchmark excludes country-specific fixed effects, while a random-effects model is retained as a supplementary comparison. The estimated coefficients are interpreted as partial associations rather than causal effects. Model specification and inferential sensitivity are assessed using the Hausman test, serial-correlation and heteroskedasticity diagnostics, cross-sectional-dependence tests, and a PCSE covariance correction applied to the preferred fixed-effects specification. The Hausman statistic (22.82, p = 0.0001) favors the fixed-effects specification, for which the reported coefficient of determination is R² = 0.798. Trade openness is positively and significantly associated with tax revenue mobilization (β = 0.059, p < 0.001) and remains highly significant under the PCSE correction. Governance is also positively associated with tax revenue mobilization (β = 1.095) and is statistically significant in the baseline fixed-effects specification (p = 0.036), although its statistical significance weakens under the PCSE correction (p = 0.102). Gross domestic product per capita and industrial value added are not statistically significant. Morocco records an average fiscal-effort ratio of approximately 1.095 over the study period, indicating that observed tax revenue is, on average, moderately above the model-predicted fiscal potential. Overall, the findings show a robust positive association between trade openness and domestic revenue mobilization, while the governance association remains positive but is more sensitive to the covariance specification. By distinguishing fiscal-effort benchmarking from broader dimensions of tax-system performance, the study contributes to the literature on fiscal capacity and offers policy-relevant evidence for developing and emerging economies seeking to strengthen long-term fiscal resilience.