draining development.pdf - Khazar University

The Political Economy of Controlling Tax Evasion and Illicit Flows 87Figure 3.2. The Political Economy Model of Tax Evasion Driving Illicit Capital FlowsIllicit capital flowInternationalpoliticaleconomyOpportunityCitizenperceptionsTaxevasionStateeffectiveness(see figure 3.1)DomesticpoliticaleconomySource: Author compilation.Alm and Martinez-Vazquez (2003, 158) find that government candecrease evasion “by providing goods that their citizens prefer more, byproviding these goods in a more efficient manner, or by more effectivelyemphasizing that taxes are necessary for receipt of government services.”Alm and Martinez-Vazquez (2003, 163) conclude that “compliance isstrongly affected by the strength and commitment to the social norm ofcompliance.” This is unlikely, for instance, in Malawi, where, in 2000, thegovernment admitted that a third of public revenues were stolen annuallyby civil servants. 40 At the other end of the governance spectrum,countries with a strong political settlement and an effective administration,as in Scandinavia, witness the coexistence of large nominal andeffective tax rates with low levels of evasion. 41 In effective governancecontexts, therefore, taxpayers do perceive taxation as less a burden andmore of an investment in an effective state. 42Variation in state effectiveness and, therefore, in the opportunity toturn evasion into illicit capital flows is the meeting point of the domesticand the international political economy (figure 3.2). Efforts to stem capitalflight date back to the League of Nations before World War II. The politicalwill to tackle illicit capital flows still requires the combination of effectivenational commitment to development and international coordination.This has been lacking, because, internationally and domestically, “[tax] ispredominantly a matter of political power” (Kaldor 1963, 418).