Tax reform can encounter strong resistance from vested interests, especially from elites who may bear the greatest burden of taxation. Political economy analysis can help to identify opposition to reform from powerful elites and lobbies (de Souza, 2013), and to identify ‘windows of opportunity’ for reform such as those that can occur during periods of fiscal crisis or political transition (Prichard et al., 2012). There is significant literature on political economy analysis in general, but relatively limited evidence specifically on how to understand and work with the political economy of tax reform.
Emerging evidence from regional and country case studies suggests several strategies that have helped to minimise resistance to reform, and to align reform with the political economy context (Fairfield, 2013; Hassan & Prichard, 2013; Jibao & Prichard, 2013; Booth, 2014; Fjeldstadt, 2005):
- phasing in tax increases gradually
- obscuring the impact of tax reforms
- appealing to fairness and equity
- linking reform to specific individual, general, and/or elite benefits
- engaging with both formal and informal (e.g. family) networks and institutions
- modest and targeted international support
- central government support in the case of local taxation
- high-level leadership to overcome opposition from powerful elites
- building reform coalitions
- strategies of negotiation and bargaining with taxpayers rather than simply relying on coercion
- focusing on flexible goals and feasible reforms, rather than pursuing ideal reforms and predetermined blueprints.
Key reading
Fairfield, T. (2013). Going Where the Money Is: Strategies for Taxing Economic Elites in Unequal Democracies. World Development, 47, 42-57.
This peer-reviewed journal article, based on a literature review and qualitative analysis, identifies six strategies that help facilitate tax reform by mobilising popular support or moderating economic elites’ antagonism: (1) a ‘foot-in-the-door’ approach of gradually phasing in taxes or incremental increases; (2) reducing taxpayers’ awareness of the tax burden by using taxes with less visibility, such as social security taxes deducted at source rather than direct income taxes; (3) emphasising fairness or equity, such as implementing progressive and targeted taxes and ensuring that everyone of similar means bears similar tax burdens; (4) linking tax reforms and increases to the provision of popular benefits; (5) linking reforms to broad public goods such as national security or prestige, socio-political stability, or economic stability; and (6) compensating elites by providing targeted benefits such as tax cuts or subsidies that benefit them. Case studies of reforms in Latin America provide some evidence about how these strategies have played out in reality. In Chile, the success of reforms in 2001 and 2005 that broadened the tax base was attributed to successful appeals to legitimacy in spite of businesses’ strong political power. In Argentina in the 1990s, obfuscating the impact of taxes helped build support to circumvent resistance from financial-sector elites, although not permanently. In Bolivia in 2003, failure to adequately emphasise fairness and equity contributed to confusion and eventually anti-tax protests. The study concludes that in general, reforms are more likely to succeed if they are incremental rather than comprehensive, if they are supported by multiple strategies applied simultaneously, and if they are tailored to the particular context at hand.
See full text
Hassan, M. & Prichard, W. (2013). The Political Economy of Tax Reform in Bangladesh: Political Settlements, Informal Institutions and the Negotiation of Reform (ICTD Working Paper 14). Brighton: Institute of Development Studies.
This literature review and case study of Bangladeshi tax reform over the last two decades emphasises the importance of understanding both informal and formal institutions, as well as the micro-level incentives which shape tax negotiation. The study finds that the Bangladesh tax system is characterised by high levels of discretion and corruption underpinned by robust informal institutions. These serve the core interests of political, economic and administrative actors across society and include elites, as well as rank and file revenue staff. The paper notes there are risks for certain actors from the continued informality, and that recent shifts in the influence of informal networks, and instances in which the tax system has been deployed against political opponents, may strengthen support for tax reform.
See full text
Jibao, S. & Prichard, W. (2013). Rebuilding Local Government Finance After Conflict: The Political Economy of Property Tax Reform in Post-Conflict Sierra Leone (ICTD Working Paper 12). Brighton: Institute of Development Studies.
This literature review and case study of relatively successful local property tax reforms in the four largest city councils in Sierra Leone highlights three key messages about the determinants of successful reform. The paper argues that: (1) modest and targeted support from the international community and the central government has been critical; (2) success is dependent on high-level leadership to overcome resistance, particularly from large property owners; and (3) reform strategies that are comparatively contractual (i.e. characterised by institutionalised, negotiable methods of assessing and collecting revenue) can contribute to a virtuous cycle of improved governance, and help to build sustainable political support for continued reform. The paper also notes that tax reform depends on long-term, hands-on, local-level partnerships.
See full text
Booth, D. (2014). Aiding Institutional Reform in Developing Countries: Lessons from the Philippines on what works, what doesn’t and why. The Asia Foundation and the Overseas Development Institute.
This literature review and case study analysis on the effects of reforms to alcohol and tobacco taxes and property law in the Philippines in 2012 highlights the role of reform coalitions. The paper argues that a core group of actors within and outside government were able to address the coordination problems that normally afflict broad-based campaigns, make tactical decisions about how to divide the opposition, and make alliances without the need for consensus other than on the reform objective itself. Key recommendations from the paper are building tacit coalitions in a pragmatic way, avoiding being trapped in a predetermined blueprint of reform, avoiding reforms that are likely to meet greatest resistance, and pursuing the best possible policy changes, given the context.
See full text
Fjeldstad, O-H. (2005). Corruption in Tax Administration: Lessons from Institutional Reforms in Uganda (CMI Working Paper 2005:10). Bergen: Chr. Michelsen Institute.
A case study in Uganda looked at why tax reform efforts failed to remedy falling revenue levels and increased perceptions of corruption in the Ugandan Revenue Agency. Reforms that stressed monetary rewards and incentives may have failed because of the importance of family networks. Increased salaries may mean officials pay out more to meet extensive social obligations, and in some cases actually result in a net loss to the individual. Effective reforms may need to work with, or interrupt, the influence of kin-based networks. One such approach could be in-kind benefits which the author suggests are popular with civil servants partly because they are harder to share.
See full text
- ‘Political economy analysis aims to situate development interventions within an understanding of the prevailing political and economic processes in society – specifically, the incentives, relationships, distribution and contestation of power between different groups and individuals – all of which greatly impact on development outcomes.’ (Mcloughlin, 2012, p.5). For further information on political economy analysis see Mcloughlin, C. (2012). Topic Guide on Political Economy Analysis. Birmingham, UK: GSDRC, University of Birmingham.
- ‘“Windows of opportunity” occur when political economy factors align so as to enable progress’ (Rao, 2013, p.14). For further information on ‘windows of opportunity’ see Flexibility, pragmatism, and being vigilant for opportunities in Rao, S., (2013). Civil service reform: Topic guide. Birmingham, UK: GSDRC, University of Birmingham.
- The political economy of tax reform in Latin America: A critical review. Washington, DC: Woodrow Wilson Center. See document online
- Prichard, W., Brun, J., & Morrissey, O. (2012). Donors, aid and taxation in developing countries: An overview (ICTD Working Paper 6). Brighton: Institute of Development Studies. See document online
