Taxation and accountability: how does revenue influence political change?

19 June 2002 12:00 - 13:30 GMT+01 (BST)
Public event

Speakers:
Mick Moore
, IDS Centre for the Future State
Jonathan DiJohn, LSE Development Research Centre, Crisis States Programme

Chair:
David Booth
, ODI

Description

This event discussed how dependence on tax is important to constructing a bureaucracy based on meritocracy and that tastatistical tests show a correlation between oil/mineral economies and poor government, more conflict and low human development.

  1. Mick Moore - "Political Quality: The Political Consequences of Unearned Income"
    Taxation is more significant in the construction of states than is often believed, as Tilly demonstrated. The process of raising revenue is central to state formation. Creating a dependence on tax is important to constructing a bureaucracy based on meritocracy (the ability to raise money and not just spend it). It tends towards the creation of representative government, creating the possibility for a positive relation between state and citizens. It creates institutional possibilities for deliberation between the state and society over public policy. However, many states in the South are not dependent on taxation. They are rentier states deriving revenue from resource rents (oil, minerals) or strategic rents (development aid).

    Statistical tests show a correlation between oil/mineral economies and poor government, more conflict and low human development. Whether or not a reliance on taxation breeds better government depends on the institutional context. Multiple local taxes in East Africa or China do not promote economic activity. One cannot just prescribe raising more taxes as the experience of coercive revenue authorities in Sub-Saharan Africa demonstrates. On the other hand, donors may have a negative impact on government through their provision of aid, when the availability of aid removes accountability of public authorities to their citizens.

  2. Jonathan DiJohn - "Taxation and Governance"
    In the reigning "good governance" paradigm, there is not enough emphasis on where state capacity comes from or about power. There is little attention given to resource mobilisation in discussions about governance. The World Banks, WDR in 1997, which focused on governance, ignores taxation.
    There are problems with rentier state arguments, even as they make a contribution by identifying revenue as a key determinant to governance. The "staple thesis", which argues that natural resource endowments determine development outcomes is going through a revival. The central premise of the rentier model is that when the state gets unearned revenues this reduces accountability and incentives for efficiency and tends to promote corruption. Those with poor natural endowments tend to have a "benevolent state", while those based on natural resource income tend to have a predatory state.

    A consideration of the empirical evidence does not support this thesis on three tests:

    (a) Do resource rich economies have more conflict? There has been greater conflict in non-mineral economies. There are as many refugees and displaced people in resource rich as in resource poor economies.
    (b) There is a selection bias in the rentier state approaches;
    (c) There is no correlation between successful economic growth or the presence of corruption and the resource endowments of a country.
    What is central is the way late developers mobilise resources, not simply the source of revenue. The key difference between successful and less successful countries is related to the level of savings and the distribution of investment - whether there is forces savings, land reform etc. The evidence demonstrates that the "state of nature" does not determine the "nature of the state".

  3. Discussion from the floor:
    George Jones, LSE, raised the problem of devising financing system for local government. Mick Moore should extend his argument to look at different types of taxation, with some promoting accountability more than others. Local governments depending on a grant do not have a context for improving accountability so how should their taxation system be organised? David Bevin, Oxford, argued in a similar vein.
    Chris Scott, LSE, suggested a hypothesis lies behind Mick Moore's paper: states that rely on unearned income have little incentive to increase tax. However there is a great deal of variance in levels and forms of tax that needs some further explanation and this cannot be achieved through econometric analyses. We need to move away from cross country comparisons to look at qualitative cases, like Latin America in the 1930s to gain insight into how revenue can be and has been generated.
    Simon Maxwell, ODI, pointed to the contradictory messages coming from political scientists. We need to focus on the different ways governments raise resources since they are not only raised through taxation. Obviously, we cannot argue that there should be no aid until there is taxation.
    Teddy Brett, DRC DESTIN, argued that in Africa there are only four mineral rich economies but a continent of predatory states. There are political reasons for the differences in performance and taxation has been a centre of predation.
    James Putzel, DRC DESTIN, asked the speakers to respond to the Paul Collier proposition that for greatly weakened states the priority must be in developing capacity to spend resources (available through aid etc) and focusing on taxation is a best a distraction and at worst a disincentive to investment and business activity.
    Manoj Srivastava, DRC DESTIN, argued that it is important to see the incentive systems behind different schemes of taxation. When urban people are taxed to fund employment schemes in rural areas this leads to a particular type of incentive. The most corrupt subgroup within the state is often those involved in tax raising and this corruption is impervious to public scrutiny.

  4. Mick Moore responded saying many rentier state models are overdrawn and there is no version without fault. Do different types of tax make a difference? The distinction between direct and indirect taxation is not relevant. VAT can generate a great deal of information about an economy. Centrally managed systems of grants are not necessarily negative. Michael Ross of UCLA has the most important statistical analysis of these issues and his data demonstrates a correlation between mineral dependence and poor performance. Jonathan DiJohn emphasised that taxation is not yet considered one of the fundamentals of good governance and it should be. The World Bank tends to see state capacity as entirely a question of inheritance. Broadly speaking most developing countries have a similar rate of tax collection as a percentage of GDP but composition differs. Latin America has less income and corporate taxation than East Asia. Cross country comparative data does not take account of the time frame. The portrait of revenue in Venezuela in 1975 was very different than in 1990.