| |
Contributions from
the Column
Focus
No representation without taxation
VAT triumph
The meaningful goal of fairness: sub-Saharan tax regimes
Funding municipal budgets in Benin and Rwanda
Selfreliance revisited: enabling governments to do their job
“It is extremely difficult to negotiate PPP contracts”
02/2007
|
|
No representation without taxation
Governments that depend on taxes need the consent of their citizens. They must establish trust-worthy systems of revenue collection, and design policies responsibly. In historical terms, parliaments’ budgetary rights were the base for democracy.
[ By Mick Moore ]
Governments need money to pay for health services, education, roads, agricultural research and other public goods. Therefore, they have to raise funds at a massive scale. If one compares the effects alternative sources of revenue have on governance, taxation is clearly the best choice. Basically, there are only two other relevant sources: foreign aid and income generated from controlling the extraction and export of natural resources.
In theory, there are several reasons for preferring taxation over the other two. It makes sense to spell them out step by step. First of all, there are effects on the governments themselves.
– The prosperity of any tax-collecting government
depends on having prosperous citizens and enterprises. Accordingly, these governments have a self-interest in development and growth, which makes them responsive to the needs of their economies and people.
– To raise taxes reliably, moreover, governments need efficient, accountable and honest revenue services. It is a productive challenge to invest in creating, training and sustaining such agencies, which then tend to constitute the core of good civil services in general. In contrast, it does not require much competence to raise money from aid donors or oil wells.
Second, taxes engage citizens. Taxpayers want to know what is happening to “their” money. Many are prepared to organise in attempts to hold governments to account. The knowledge that their government is funded from oil or aid does not engage citizens in the same way.
Finally, taxation affects the way governments and citizens interact. There is great scope – though no guarantee – for productive bargaining and deal-making between the two sides.
– If the government and taxpayers can reach agreements on what taxes will be levied, how, and at what levels, then tax demands become more predictable and compliance more likely. Business will be more secure in making investments, and governments can undertake long-term fiscal planning. Aid, on the other hand, is the least predictable source of governmental revenues, and commodity prices are very volatile.
– Government officials and citizen-taxpayers representatives who sit down to bargain about taxes will normally also discuss the policies the state will pursue in return for taxes. Doing so makes mutually beneficial decisions more likely and improves policy-making in general.
– Representatives of citizen-taxpayers will demand public scrutiny of how public money is spent, forcing governments to act more transparently.
– Accordingly, the elected legislature will be strengthened in relation to the executive.
Suppportive empirical evidence
These theoretical considerations are supported by three kinds of empirical evidence. The first is historical, especially rich for Europe in the past three centuries. Typically, rulers’ need for money was the driving force behind extending the power of representative legislatures. This connection was widely recognised at the time. Parliaments’ budgetary powers thus became the cornerstone of democracy.
The second kind of evidence is contemporary and abundant, but a bit indirect. It has become quite evident that governments, which largely depend on revenues from oil and gas, for example, rule badly. They are especially prone to act in undemocratic, militaristic and exclusive ways. Dependence on aid, moreover, obviously undermines a country’s sovereignty.
A third kind of practical evidence stems from comparing sub-national administrations within the same country. For instance, Carlos Gervasoni (2006) looked at the recent political history of Argentina’s provinces, which depend on taxes, substantial transfers from the central government and, in a few cases, local oil revenues. He found that the provinces that relied most on broad taxation of their citizens had also been the most democratic ones historically. In a similar vein, Barak Hoffman and Clark Gibson (2006) found that district governments in Tanzania spend higher proportions of the revenues they generate on services for the citizens (rather than on themselves) if local populations are economically mobile and can thus avoid coercive local taxation.
The question may arise, whether taxation systems make wealthy segments of any given population more influential, simply because they pay more taxes. However, this is not a crucial matter. After all, the principal problem in countries with bad governance is that governments are barely responsive and accountable to anyone at all. If concern for making taxpayers part with their money more willingly were to restrain their behaviour and make them less repressive, that would be more than welcome. It seems unlikely that poorer sections of the population would not benefit, too. In any case, they are very unlikely to be worse off.
If one accepts that engaging citizens is an important aspect of taxation, it makes sense to raise those taxes that taxpayers are most aware of. These are normally “direct” taxes on income, property, wealth et cetera. However, the old distinction between direct and “indirect” taxes (on sales or turnover) is blurring. The fastest growing tax in the world is VAT (value-added tax). It exists in most developing countries today. While formally an indirect tax, VAT is a direct tax from a political perspective because it impacts very perceptibly on enterprises.
Its introduction has been resisted strongly in some developing countries, mainly because of the visible, continuing book-keeping burden it imposes on small businesses. Once VAT is introduced, however, business managers and tax authorities tend to be in continual negotiation over precise procedures and coverage and, in the case of exporters, repayment of VAT export rebates. In sum, the “direct-indirect” issue does not matter very much.
Reconsidering budget support
Donor governments should bare in mind that taxation is not only a matter of finances, it is also a precondition of good governance. Negotiations about budget support gives them a real opportunity to talk to recipient governments about raising revenues locally. So far, we probably do not have enough convincing evidence about the bad effects of high aid levels on governance to use this alone as an argument to reduce aid. But aid donors would act irresponsibly if they did not take the issue seriously by seizing this opportunity to talk about replacing aid.
Fortunately, some are doing so. There are interesting developments within the Development Assistance Committee of the OECD. Germany could use its position as Chair of the G8 this year to advance this agenda. It is high time to use the enthusiasm among senior African tax administrators who want to use their expertise to end what they see as humiliating, frustrating, endless aid dependence.
Dr. Mick Moore
is professorial fellow at the Institute of Development Studies at the University of Sussex.
m.p.moore@ids.ac.uk
References:
Gervasoni, C., 2006:
A rentier theory of subnational authoritarian enclaves:
The politically regressive effects of progressive federal revenue distribution (Paper presented at the annual meeting of the American Political Science
Association)
Hoffman, B. D. and C. C. Gibson, 2006:
Mobility and the political economy of taxation in Tanzania (Paper presented at the annual meeting of the American Political Science Association).
Moore, Mick, 2007 (forthcoming):
How does taxation affect the quality of governance?, IDS Working Paper, http://www.ids.ac.uk
|
