draining development.pdf - Khazar University

86 Draining Developmentfrom the generally lower tax contexts of developing countries to thehigher tax environment of the developed world. Given overall lowerrates of return on such investment, the main rationale would seem tobe flight because of a lack of faith in domestic rates of return thatderives from a lack of genuine elite commitment to national development,the political risk arising from political instability, and rampantcorruption (Fuest and Riedel 2009). This appears to be confirmed byestimates of the capital flight from the African continent of aboutUS$400 billion between 1970 and 2005; around US$13 billion per yearleft the continent between 1991 and 2004, or a huge 7.6 percent ofannual GDP (Eurodad 2008). So, in contexts of poor governance, thewide overlap between capital flight and capital flows is reflected in thefrequent conflation of the two terms.3. Tax administrative competence: capacity to contain free-riding andmaintain a credible commitment to paying taxes. This is critical tocompliance; the state’s legitimacy is reflected in the tax authority’spowers of enforcement (that is, accountable coercion). 36 In manydeveloping countries, political influence is often pronounced in theselection and promotion of staff at all levels in the revenue administration,thereby facilitating evasion and corruption such as the case ofBenin in the late 1990s, when 25 percent of revenues were lost (van deWalle 2001). 37 Tax evasion is also significantly influenced by the interactionsbetween taxpayers and the tax authorities: more respectfulbehavior on the part of tax authorities is associated with higher ratesof tax compliance (Feld and Frey 2002). At the same time, differencesin treatment by tax authorities arise from differences in the quality ofpolitical participation: “regime type matters in the explanation of thestructure of taxation” (Kenny and Winer 2006, 183).Vari ations in political governance away from political settlements andthe quality of the institutions shaping administrative competence thereforelie at the heart of varying patterns in the tax evasion dimension ofillicit capital flows. 38 Citizen perceptions of the legitimacy of taxationand of the effectiveness of the state combine in the calculation citizensmake of the tax cost/benefit–burden/contribution equation. Whethertaxation is viewed as a value-for-money contribution to society or simplyan unproductive burden depends also on how it is raised and used. 39