draining development.pdf - Khazar University

82 Draining Developmentproviding better services for the population (Yashar 1997). The legislaturehas often appeared to facilitate evasion and avoidance deliberately bymaking tax laws overly complex.Without political support to tackle evasion by powerful interests, therevenue authorities have instead directed their anti–tax evasion efforttoward small taxpayers. The probability of evaders being caught hasbeen low; in 2003, the Guatemalan revenue administration estimatedtotal tax evasion at more than two-thirds of actual collection, with significantvariation across revenue bases, at 29 percent for VAT, but 63 percentfor income taxes. 28 If tax evasion is detected, the administrative andlegal procedures are complicated and costly for the state. Penalties for taxevasion remain insignificant because of the absence of political determinationto impose administrative and judicial sanctions in any effectiveor timely manner, and tax amnesties are too frequent and generous(Sánchez, O. 2009). The total tax-GDP ratio rose from a low of 6.8 percentwhen the civil war ended to 10.3 percent of GDP in 2006; citizensstill widely regard tax evasion in Guatemala as ethical because the perceptionremains that “a significant portion of the money collected windsup in the pockets of corrupt politicians or their families and friends”(McGee and Lingle 2005, 489). 29Another natural experiment in the links between illicit outflows andthe legitimacy of taxation can be seen in the contrast between Argentinaand Chile, despite similar cultures, levels of economic development, history,and federal constitutions. Tax evasion in Argentina has consistentlybeen high, the result of political instability and weak institutions (deMelo 2007). Sporadic efforts to crack down on evasion, including by theMenem presidency in the early 1990s, lacked political sustainability. 30By contrast, in the early 20th century, Chile achieved a political consensusagainst tolerating tax evasion and in favor of alleviating povertyand advancing national development through an effective tax system(Bergman 2009). With Chile’s return to democracy in 1990, taxpayerswere persuaded through the Concertación (the Concert of Parties forDemocracy) that higher taxation was a small price to pay if democracywas to work by delivering an effective social contract (Boylan 1996;Vihanto 2000; Bergman 2009). Income tax evasion rates in Chile fellfrom 61.4 percent in 1990 to 42.6 percent in 1995 (Barra and Jarratt1998). This fiscal social contract covered indirect and direct taxation, so