draining development.pdf - Khazar University

The Political Economy of Controlling Tax Evasion and Illicit Flows 85Figure 3.1. The Political Economy of an Effective State and Tax SystemTaxsystemGovernance qualityPolitical settlementSource: Author compilation.toward the political institutions shaping the governance context. Theseoperate on three layers, as follows (see figure 3.1):1. The political settlement: the informal and formal rules of the gameover political power. 34 This includes both the formal rules for managingpolitics (peace treaties, constitutional provisions, parliamentaryrules, the organization of political parties, and so on) and the informalnetworks, family ties, and social norms that shape politicalbehaviors. 35 More an iterative process than a critical juncture, thepolitical settlement shapes tax morale as an expression of social order,a collective interest, and a sense of political commitment to improvepublic institutions, constrain corruption, and deliver public goods(Andreoni, Erard, and Feinstein 1998). The settlement develops fromthe national political community that delivers the perceived fairnessof and trust in a credible state; within this context, the tax systemrepresents a legitimate and effective exercise of state power, while theefficient provision of public goods benefits taxpayers and ordinarycitizens (Lieberman 2003). Politics shapes attitudes and behaviorsrelative to tax evasion, and the differences across groups within acountry are potentially as significant as the differences across countries(Gërxhani and Schram 2002).2. General quality of governance: state institutional effectiveness builds onthe political settlement. Capital flight (rather than capital flows seekingonly higher rates of return) moves from weak to effective governance,