Tax Potential in North Macedonia

This paper assesses North Macedonia’s tax potential and reform options to support fiscal consolidation and create space for rising long-term spending pressures. Tax revenue remains the lowest in the region, reflecting low statutory rates, extensive tax expenditures, weak tax efficiency, and a sizable informal economy. Using a stochastic frontier model for 154 countries, the paper estimates tax potential at about 21 percent of GDP, implying a tax gap of around 3½ percent of GDP. Closing this gap will require VAT base broadening, rationalized CIT incentives, more progressive PIT, higher environmental and health excises, stronger property taxation, and improved tax administration.