How do patterns of taxation affect state capacity and production? What is the relationship between elite bargains and taxation patterns? How do aid flows and multilateral donor reforms affect statebuilding? This paper examines the political economy of taxation in a range of countries. It argues that the process of tax collection is a powerful lens through which to assess power distribution and the legitimacy of the state and of powerful interest groups in civil society.
Taxation allows governments to ensure sustainable funding for social programmes and for public investments to promote economic growth and development. As aid generally diminishes over time, domestic resources are necessary to sustain these institutions and programmes. Taxation is the main nexus that binds state officials with interest groups and citizens. Not only can taxation enhance government accountability, it also provides a focal point around which interest groups can mobilise to support, resist and even propose tax policies.
The diversity of the tax base is a telling indicator of state ability to engage with different sectors and regions. It is also indicative of the degree to which state authority permeates society. Legitimacy comes in large part from government delivery of services that people want and need.
Taxation and tax reform are central to statebuilding:
- Taxation can be a useful indicator of the extent to which a state tends towards fragility or resilience.
- The nature of elite bargains and political settlements has important implications for patterns of taxation.
- The toleration of large-scale tax evasion often results from elite bargains. Low levels of legitimacy are also often behind a state’s inability to ensure compliance.
- Aid dependency has not generally harmed the domestic tax effort. However, as project aid often ends up ‘off-budget’, high levels of this can inhibit aid coordination and macroeconomic planning and can weaken the fiscal social contract.
- Tax administrative reforms are often designed to increase tax revenue and are not coordinated with how taxation affects production growth.
While identifying administrative constraints needs to be central when designing short-term tax policies, the longer-term goal of improving tax capacity (thus contributing to statebuilding) also needs to be part of policy interventions. Tax-reform processes require political analysis to understand what types of reforms are feasible in a given context. In particular, understanding how the elite bargain is constructed and how it is related to political stability is central to proposing tax reforms that are politically sustainable. Further implications are that:
- The problem of a ‘dual public sector’ created by aid delivery bypassing the state can be overcome with ‘dual-control oversight mechanisms’. These can reduce corruption and ensure that resources flow through the state.
- As tax is a more objective measure of governance than many prevailing governance indicators, donors and academics might more systematically incorporate it into indicators of fragility, resilience and governance.
- Future work should include identifying who people give money to in return for security (personal or property) or services. This could help to map competing sources of authority in fragile states, such as political parties, clans, religious organisations, or armed groups.
- More research is needed on how foreign actors affect taxation and elite bargains. Initiatives by multinational companies or international donors might have substantial effects on future tax-collection processes. These could include: mining deals; policies on mining transparency; initiatives to crack down on tax havens, off-shore centres and money laundering; and environmental taxes.
- More research is needed on what matters in terms of policy sequencing between tax reform and public expenditure. It is not the tax system itself, but the way in which tax is spent, that affects state legitimacy and resilience.
