The literature on taxation and statebuilding is primarily theoretical and guidance-oriented, with some supportive case study evidence. There is little literature specifically on taxation in fragile and conflict-affected states, especially in relation to statebuilding. That which does exist highlights the need for taxation to be dealt with during the early stages of post-conflict planning, despite the potential tax revenue being low (Therkildsen, 2008).
The review literature identifies a number of channels through which taxation can impact statebuilding (Prichard, 2010; Fjeldstad & Moore, 2008):
- Common interest processes: governments dependent on taxes, have stronger incentives to promote the prosperity of taxpayers
- State apparatus and processes: dependence on taxes requires states to develop a bureaucratic apparatus which can lead to broader public administration improvements
- Accountability processes: taxation may engage taxpayer-citizens collectively in politics and lead them to make claims on government for reciprocity and encouraging constructive state-society engagement around taxes
- Adequate revenue: taxation can provide higher, more sustainable resources to support citizen demands
- Appropriate revenue: shifting the distributional impact of taxation to a normatively more appropriate pattern.
A number of observational and econometric studies show these channels in operation. An observational study in Nigeria found that regions under different tax regimes during colonial times developed different local government capacities (Berger, 2009). One influential econometric analysis study finds that increases in taxes are associated with improvements in services or with democratic reforms (Ross, 2004). A 2014 econometric analysis supports this conclusion finding that increases in non-tax revenue result in a reduced likelihood that a non-democratic state will transition to democracy, and that there is a generally positive association between tax reliance and democracy (Prichard, Salardi, & Segal, 2014). Another such study finds that states that tax the poor prioritise basic public services over property rights, while states that tax the rich do the reverse (Timmons, 2005). An experimental study in Uganda finds that actions that mimic taxation cause greater demands on those designated as leaders in the experiment (Martin, 2013).
Key reading
Prichard, W. (2010). Taxation and State Building: Towards a Governance Focused Tax Reform Agenda (Working Paper 341). Brighton, UK: Institute of Development Studies.
This literature review argues that particular tax reforms can generate gains in state capacity and trigger the expansion of responsive and accountable government through common interest processes, state apparatus processes, and accountability processes. Governments and donors can strengthen taxation-governance links by reforming tax administrations to catalyse bureaucratic reforms, reorienting existing tax reform programmes towards greater emphasis on how collecting taxes can contribute to statebuilding goals, and supporting civil society actors to engage in tax debates.
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Fjeldstad, O-H. & Moore, M. (2008). Tax Reform and State Building in a Globalized World. In Brautigam, D., Fjeldstad, O.-H., & Moore, M. (eds). Taxation and State Building in Developing Countries (ch. 10). Cambridge: Cambridge University Press.
This book chapter, a literature review on statebuilding and taxation, concludes that tax reform may contribute to state-building through providing adequate revenue, shifting towards more appropriate revenue sources, creating more effective tax administrations, and encouraging constructive state-society engagement around taxes. The authors argue that tax reform has been successful in producing more effective and efficient tax administrations, but that some important opportunities have been missed. These include involving poorer countries in designing reforms; taxing the informal sector, property, and aid agencies; considering links across government when promoting centralised revenue authorities. The authors argue for greater attention to politics and citizen participation.
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Therkildsen, O. (2008). Taxation and state-building with a (more) human face. Copenhagen, Denmark: Danish Institute for International Studies (DIIS).
This policy brief, based on a review of literature, argues for a push for broader-based taxation in fragile states. The brief notes that key features of taxation and governance in post-conflict and fragile states are: low tax to GDP ratio; high dependence on trade taxes; very high aid dependence; off-budget donor-funded programming; and private contractors providing security and public services. The brief argues that taxation issues should be dealt with at early stages of planning in post-conflict states, even if revenue yields may be modest to start with. Taxes that suit local circumstances should be identified and prioritised over current global ‘best practice’. There should be attempts to reduce or abolish tax exemptions for donors and their contractors, such as NGOs.
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- Defined by the OECD as ‘an endogenous process to enhance capacity, institutions and legitimacy of the state driven by state-society relations’. For further information on statebuilding see Haider, H. (2014). Statebuilding and peacebuilding in situations of conflict and fragility (Topic Guide Supplement). Birmingham: GSDRC, University of Birmingham.
- Berger, D. (2009). Taxes, institutions, and local governance: Evidence from a natural experiment in colonial Nigeria. Unpublished manuscript, Department of Politics, New York University. See document online
- Martin, L. (2013, May). Taxation and accountability: Experimental evidence for taxation’s effect on citizen behavior. Paper presented at a meeting of the Working Group on African Political Economy, Washington, DC. See document online
- Prichard, P., Salardi, P., & Segal, P. (2014). Taxation,non-tax revenue and democracy: New evidence using new cross-country data (ICTD Working Paper 23). Brighton: Institute of Development Studies. See document online
- Ross, M. L. (2004). Does taxation lead to representation? British Journal of Political Science, 34(2), 229-249. See document online
- Timmons, J. F. (2005). The fiscal contract: States, taxes, and public services. World Politics, 57(4), 530-567. See document online