Determinants of Tax Capacity in MENA Region with Emphasis to Good Governance

Taxes and institutions are related to each other in different ways. Good tax system requires appropriate institutions that set the political, cultural and economic conditions and contexts to improve tax performance. Quality of governance is one of the criteria to determine the quality of institutional environment and therefore the factors affecting the tax performance. In this study, we investigate the effect of good governance indicators on tax capacity as a measure of tax system performance in countries of the MENA region (Middle East and North Africa) during 1996 - 2012. The results suggest that good governance, degree of trade openness, degree of monetarization, foreign debt, population growth and lagged rent revenue have positive effect and the log of GDP per capita has negative and significant effect on the tax capacity; whereas, political stability, quality of regulation and control of corruption have positive and significant effect. Other factors are not significant. The quality of rules and regulations is the most effective variable on the tax capacity.