Explaining Central Government’s Tax Revenue Categories through the Bradley-Terry Regression Trunk Model

Abstract

The Bradley-Terry Regression Trunk (BTRT) model combines the log-linear Bradley-Terry model, including subject-specific covariates, with a particular tree-based model, the so-called regression trunk. It aims to consider simultaneously the main effects and the interaction effects of covariates on data expressed as paired comparisons. We apply this model to financial data expressed as rankings and then transformed into paired comparisons. Tax revenues differentiated by category represent the statistical units of the analysis (i.e., taxes on income, social security contributions, taxes on property, and taxes on goods and services). We combine data from OECD, World Bank, and IMF databases for the year 2018 to investigate the effect size of socio-economic covariates and their interaction on the composition of tax revenues for a set of 100 countries worldwide. We also present a comparison with a more established method proposed in tax determinants literature and with two alternative models used for matched pairs. Finally, we discuss the implications of reported results for stakeholders and policymakers.

Keywords

• Cross-country analysis
• Ordinal data
• Paired comparisons
• Public finance
• Rankings
• Regression tree