Democracy, Tax and State-building
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Tax Fosters Accountability: the Fourth “R”
Tax has four main purposes and outcomes, which one might call the four
“Rs”. Most of us are familiar with two or three of these “Rs,” but do
not think about, or have forgotten, the fourth. This fourth element is
one of the most important of them all.
The Four "R"s
The first “R” is Revenue. Taxes raise money to pay for health, roads and education, or for more indirect things like good regulation and administration. We are all familiar with, and almost all of us accept, this function. Unfortunately, some people think this is all that taxes should do (and a few extremists, such as hardline anarchists or extreme libertarians, foolishly think that all taxation is theft and should be abolished.)
The second “R” is Redistribution: taxation can
help reduce poverty and inequality, and spread the benefits of
development more widely. Different taxes have different effects: income
taxes are usually progressive (that is, they reduce inequality;)
corporate taxes are regressive (increase inequality) at low incomes but
then become progressive; property taxes are normally progressive; and
indirect taxes (such as value-added tax or VAT) are generally
regressive. Many people are familiar with this function, although not
everyone agrees with it.
The third “R” is Repricing. Taxes (and subsidies) can be used to change people’s behaviour: taxing tobacco, pollution or carbon-based energy, for example, is accepted by many people as a way to curb potentially harmful activities, particularly “externalities” that represent failures in free markets or other forms of social organisation.
The fourth “R” is Representation. Historians are familiar with this function, but many of us have forgotten it. American colonists who were being taxed under British colonial rule famously demanded “no taxation without representation.” This is not just an oddity of history, however, but a much more general rule: citizens who are taxed tend to demand accountability and representation in exchange from their rulers. People want to influence how their hard-earned money is spent; as a result, taxation helps keep governments on their toes. As a result of this bargaining between rulers and their subjects, taxation strengthens and protects channels of political representation.
(Richard Murpy has added a fifth "R": Reorganising an economy. See more here).
Unfortunately, people in rich countries and poor countries tend to take the Representation element of taxation – this fourth “R” - for granted, and debates over tax tend instead to be over the first two “Rs” in particular: how much money is raised, how stable are tax revenues, how efficient the tax system is, and how much effort should be involved in using taxation to redistribute income or wealth.
"The notion that sources of government income might significantly shape
governance has only recently entered into development policy debates.
It is still on the margins. The word ‘taxation’ appears in the
development literature mainly in the context ofthe kinds of economic
policy discussions summarised in Section 1. And those issues are
generally believed to be specialist and technical, and not to relate to
core debates about the development process. Even those aid and
development agencies noted or their capacity to generate and use policy
research continue to produce majorstatements on governance that ignore revenue and taxation issues."
There is now a growing academic literature on the connections between tax and governance. More recently, a study by Professor Michael Ross at UCLA reached a more specific conclusion: he argued that people rebel not against taxation without representation, but against a closely related matter: taxation without commensurate government services. “People may dislike taxes, but they appear to loathe paying more while receiving less from their governments. Ironically, this loathing may be a good thing: when citizens are faced with an undemocratic government that is charging unreasonably high prices for its services, they tend to demand democratic reforms.”
Part of the literature on tax and representation focuses on examples of
states where states get their revenues from sources other than their
citizens – notably mineral-dependent states, which academic research
show to have been more corrupt, conflict-ridden, authoritarian, poorer,
more unequal, and with lower long-term economic growth than their more
“normal” counterparts. In these countries, rulers do not tax citizens,
but instead tax oil companies, for example, and so the healthy
political relationships of taxation break down, and in many cases
rulers can simply afford to ignore their citizens. Foreign aid suffers
from some of the same problems of accountability, which may go a long
way towards explaining why aid has so little to show for it in terms of
long-term economic growth. Foreign borrowing can also be another source
of revenues for governments which bypass their citizens – and this,
too, has proved problematic for many countries.
As Professor Mick Moore of the UK-based Institute of Development Studies has explained: while tax has been prominently and consistently part of the daily political landscape in OECD countries, they have generally been far less prominent in poor countries, where tax politics tend to be far less public but instead is “narrow, specialised and concentrated in non-public spaces: the manoeuvrings of small pressure groups lobbying for exemptions from import duties, or individual large companies bargaining with ministers and tax officials about their assessments and liabilities.” In poorer countries much of the pressure for more responsible governments has not come from taxpayers but from external sources – notably international financial institutions, and, less often, aid agencies. Elsewhere, in a policy briefing and a longer working paper, Moore argues that policy makers, including the IMF, need to focus more on how tax is raised, not just how much, and should focus more on scrutinising the links between sources of revenue and the goals of spending, and not just focusing on spending alone.
All this, and more, has led to what Alex Cobham of Oxford University has called the Tax Consensus: a commonly accepted view of taxation, which, he explains, has been a failure, particularly for developing countries. As he put it: “The Tax Consensus has failed. It has little or no place for redistribution, and when it does so it urges redistribution through spending but not through taxation, without taking into account that governments often do not have appropriate spending tools; it mistakenly urges much lower levels of taxation than are considered appropriate for the rich contries; and levels of real (and perceived) compliance are dramatically weakened by the absence of international measures to tackle evasion through tax havens and by multinational firms. This outdated ideology now needs to be overthrown, so that poor countries can put a range of policies back on the table and be free to choose the tax policies that they really need: tax systems that raise revenue, redistribute and strengthen channels of political representation for genuinely sustainable development. The Tax Justice Network can help support this process. Until then, tax evasion and avoidance will continue to undermine the human development opportunities of the world’s poor.”
Read more about this issue in this TJN newsletter.
- The webstite Raising Tax Revenues (from 2009) contains references to a wide array of academic papers, civil society reports, policy documents and books.
- How does taxation affect the quality of governance? Institute of Development Studies, Working paper, April 2007. It is not just how much tax, but the way it is levied, that affects governance.
- New Book (2008): Taxation and State-Building in Developing Countries: Capacity and Consent
- New Paper (April 2008): Taxation and Governance in Africa, by Deborah Bräutigam
Tax and state-building in fragile states , October 2008.