Tax capacity in the OECS

This study examines tax shares and tax effort indices in the Organisation of Eastern Caribbean States(OECS) with the exception of Anguilla because of data limitations. The theoretical basis for the tax share model is similar to Heller (1975) and Leuthold (1991), where a welfare maximising public decision maker is constrained by a budget that accounts for alternative modes of financing. The cross-country approach is combined with the time series approach for the group and individual country, respectively. In order to better understand the tax structure among and across countries, the model is disaggregated by direct and indirect tax shares, along with the total tax share. Finally, to enhance the policy component of the paper, the tax effort index is regressed on the growth in GDP to determine whether or not there is fiscal drag in these economies. The paper also reviews the tax effort literature and develops the theoretical model of tax behaviour. In the latter sections the data, empirical results and policy conclusions are made.