How can tax reform support statebuilding and improve governance? This paper argues that particular reforms within the tax system can generate significant gains in state capacity and trigger the expansion of responsive and accountable government. Development agencies should focus more on the political economy of taxation. They should move beyond technocratic reforms towards an agenda that recognises the importance of equity, transparency, and the contribution of civil society.
Taxation is fundamental to sustainable development; it supports the basic functions of an effective state and sets the context for economic growth. More often overlooked is the role of taxation as a catalyst for the development of responsive and accountable government and the expansion of state capacity. Existing work tends to present tax reform as a primarily technical challenge, giving the importance of political considerations less attention. Yet there is compelling evidence that in the long term, measures to increase dialogue, transparency, equity and bargaining are essential to building a culture of tax compliance. Compliance in turn contributes to maximising revenue and minimising political conflict.
Recent research on taxation and development finds that taxation can lead to a strengthened state-society relationship, with positive consequences for state capacity and the extent to which governments are responsive and accountable to their citizens. Evidence suggests that tax reliance may generate improved governance through three channels:
- Common interest processes: Because governments are dependent on taxes, and therefore on the prosperity of taxpayers, they will have stronger incentives to promote economic growth.
- State apparatus processes: Dependence on taxes, and direct taxes in particular, requires states to develop a complex bureaucratic apparatus for tax collection. This may spearhead broader improvements in public administration.
- Accountability and responsiveness processes: Taxation engages taxpayer/citizens collectively in politics and leads them to make claims on government for reciprocity, either through short-term conflict or long-term increases in political engagement. Governments are compelled to respond to these citizen demands in order to enhance tax compliance and sustain state revenues.
Taxation can be an important catalyst for state capacity development and the expansion of responsiveness and accountability. Specific, concrete steps that can be taken by governments and donors to strengthen tax-governance links include:
- Reforming tax administrations to catalyse bureaucratic reforms both within the tax agency and within associated agencies; expanding government presence into remote areas; and increasing the availability of data through an emphasis on transparency.
- Reorienting existing tax reform programmes away from simply expanding revenue collection towards greater emphasis on how revenue is collected, and how this can contribute to broader statebuilding goals. This includes improving equity in tax enforcement and administration; improving public awareness, transparency and taxpayer services; and broadening and improving direct taxation.
- Supporting civil society actors to engage in debates about tax issues, particularly through the formation and expansion of inclusive business associations, taxpayer associations, and partnerships between government and civil society organisations.
