Tax and the Governance Dividend

This paper was originally published in Anne Mette Kjaer, Lars Buur and Lars Engberg-Pedersen (eds) - Perspectives on Politics, Production and Public Administration in Africa - Danish Institute of International Studies, 2015. taxation; politics; public spending; tax exemptions.It is now widely believed that taxation contributes to the quality of governance. There are a number of variants of the broad argument. The most general proposition is that, if governments are dependent on broad general taxation for their incomes, they will, for reasons of self-interest, be more responsive to the needs of their citizens and more likely to allow citizen representatives to share in governance. From a broad historical perspective, that argument is probably valid. The political interactions between states and citizens over tax revenues are however considerably more complicated than this. Governments can proactively use their control over the revenue collection process to divide their citizens into different, competing groups, and thereby increase governments’ own bargaining power relative to their taxpayers. This dimension of the politics of taxation systems has received relatively little attention in the substantial literature on the topic. This paper summarises and illustrates the ways in which governments can use patterns of public spending and tax exemptions to protect themselves from the potential political influence of organised taxpayers.DfID, NORAD

Obstacles to Increasing Tax Revenues in Low Income Countries

tax, tax administration, revenue, politicsThis paper is focused on the question: why do the governments of low income countries not raise more tax revenues? Two different but complementary approaches are used to answer it. The first approach is comparisons: among countries today, and within countries over time. This approach tends to generate relatively conservative answers to the central question. It leads to an emphasis on the ‘sticky’ nature of the taxation. For any individual country in ‘normal times’ – i.e. excluding situations of war, major internal conflict, the collapse or rapid reconstruction of state power - revenue collections, measured as a proportion of GDP, do not change much from year to year. This is partly because effective taxation systems require a great deal of coordination and cooperation between revenue agencies and other organisations, both inside and outside the public sector. It is hard quickly to improve the effectiveness of a complex organisational network. The ‘stickiness’ of tax collections also reflects the fact that the overall tax take – i.e. the proportion of GDP raised as public revenue – is to a significant degree determined by the structure of national economies. For logistical reasons, it is much easier to raise revenue from economies (a) that are high income, urban and non-agricultural and (b) where the ratio of international trade to GDP is high. The government of the average low income country raises less than 20 per cent of GDP in revenue. It makes no sense for such governments to aim to match OECD tax takes of 30-45 per cent of GDP.DfID, NORAD, UNRISD, SD

How does taxation affect the quality of governance?

This paper summarises the policy implications of a growing debate about the connections between taxation and the quality of governance in developing countries. Taxation – or the absence of tax – impacts on the quality of governance through two main channels. The first relates to the degree of dependence of governments on general taxation for their financial resources. Many governments do not need to make much tax effort because they have large non-tax incomes from oil, gas and mineral exports or from foreign aid. State elites are then financially independent of citizen-taxpayers. This changes the political incentives that they face, and the ways in which they seek to obtain, use and retain power. The long term consequences for governance are malign: state elites are less responsive and accountable to citizens; and, depending on the sources of non-tax revenue, may have less incentive to build up the political and organisational capacities of the state. States are likely to be simultaneously arbitrary and weak. All else being equal, the dependence of governments on general taxation has positive effects on the quality of governance. But that relationship is not automatic. How governments tax also matters. We cannot assume that, because they are fully dependent on taxation for revenues, governments will be capable, accountable, or responsive. They may levy taxes coercively, and thereby damage state-society relations and reinforce poor governance. Public authorities in contemporary poor countries face some incentives to tax coercively. Establishing more consensual taxation practices is an important practical route to improving governance. Aid donors could play a more constructive role. Keywords: taxation, accountability, responsiveness, state capacity, governance, aid, oi

The governance agenda in long term perspective : globalisation, revenues and the differentiation of states

The governance-and-development agenda that has dominated thinking since the collapse of the Soviet Bloc is fast losing credibility. It continues to be associated with a set of countries, ideas and experiences – the ‘West’ – that no longer enjoy global leadership. It has not usefully identified the role of governments in promoting economic growth. And it takes little account of the ways in which states are changing. The growing influence of the BRICs and other emerging powers is now widely appreciated. This paper explores the ways in which late twentieth century globalisation is bringing about more subtle changes in the political constitutions of states that may have considerable implications for the ways in which we are governed and the actions that may be needed to reduce the incidence of bad governance. Contrary to widespread expectations, globalisation does not necessarily lead states to become more like one another, or to converge around the ‘Western’ model of liberal democracy and market capitalism. It also leads states to compete with one another. To the extent that they compete by seeking alternative sources of revenue, this may lead them to diverge politically. The concept of political revenues – the incomes that governments and political elites obtain through the exercise of political power – is central to the analysis. One of the consequences of late twentieth century globalisation is that, in some countries, opportunities for political elites to gather (illicit) elite political revenues have expanded considerably. This helps explain why fragile states have become a normal feature of the global system. A more widespread consequence is that states enjoy a range of new non-tax revenues in addition to ‘normal’ tax revenues. This has significant implications for the accountability of governments to citizens. Keywords: governance, state, globalisation, revenue, fragile state, drugs, oil

Revenue Reform and Statebuilding in Anglophone Africa

Within the development field, tax administration reform is an area of relative success. Over the past two decades, the national revenue systems of most countries in anglophone Africa have undergone major reforms. These comprise, in particular, the introduction of Value Added Tax (VAT), the adoption of ‘advanced’ tax administration practices, and the creation of semiautonomous revenue authorities. What do these reforms imply for emerging patterns of politics and governance in anglophone Africa? The first conclusion is conceptual and theoretical. The impact of these reforms has been shaped by the broad context within which they were being implemented, especially the increasingly transnational character of many important policymaking relationships (Orenstein and Schmitz 2006; Stone 2008; Weiss 2005). Senior African revenue staff feature increasingly in transnational expert networks, and face a wider range of employment opportunities, public and private, both at home and abroad. The second conclusion is that these revenue reforms have contributed only modestly to statebuilding. While the new revenue agencies are in many respects impressive organisations, actual revenue collection has not increased much; improvements in organisational capacity have been concentrated at national and capital city level; potentially synergistic improvements in the capacity to formulate tax policy have not occurred; and some anticipated spillover benefits from improving the revenue collection apparatus have not been realised. The third conclusion is that, while these reforms have made it possible for governments to raise revenue from the organised private sector in a more ‘Weberian’ (institutionalised, rule-bound) and a more consensual manner, they have also increased the possibility that the taxation system will be shaped by private sector interests, making it difficult for governments to raise the revenue that they claim they need.DfID, NORA

The Political Economy of Long-Term Revenue Decline in Sri Lanka

taxation; Sri Lanka; history; Customs Department; Inland Revenue Department; inequality.From the 1950s to the 1980s, Sri Lankan governments collected a high proportion of Gross Domestic Product (GDP) in taxes. They spent most of that money on mass provision of health and education services, and subsidised food. Sri Lanka was a model welfare state, with unusually high human development indicators. Contemporary Sri Lankan governments spend very little on their poor citizens. A major reason is that since 1990 the proportion of GDP collected in tax revenue has steadily declined, such that it is now at unusually low levels. Internal conflict, although almost endemic, does not explain declining tax collection. The decline results from a continuous series of policy decisions to exempt wealthier people, businesses, incomes and assets from taxes. This paper analyses the more identifiable political and institutional processes through which the political preferences of the wealthy and powerful were translated into low revenue collection. They are: the declining power of popular forces (notably programmatic political parties and trade unions); the emergence of foreign aid and loans as an alternative to domestic revenue mobilisation; the institutionalisation of pressure to exempt the private sector from taxes; powerful executive presidents who undermined or dispensed with the authority of ministers of finance; and a political and institutional lock-in to a high dependence on taxes levied on a declining sector of the economy – imports – and to the Customs Department that collects them.Department for International DevelopmentBill and Melinda Gates Foundatio