draining development.pdf - Khazar University

90 Draining Developmentincome ones, the current political dynamics create little incentive tomake the necessary improvements in governance (Bratton and van deWalle 1997; Chabal and Daloz 1999). Tax evasion flourishes if an incompletepolitical settlement excludes many from the political system. Thepolitically excluded, in turn, exclude themselves from paying taxes, whilethe lack of political accountability empowers unaccountable elites toexploit their position both to evade and, in the absence of faith in longtermpolitical stability built on legitimacy, to move evaded assets abroad.A weak, corrupt, and illegitimate state drives political flight as citizensdisengage from the state, encouraging more illicit flows to escape fromthe state’s grasp.Such dynamics explain why countries often achieve an uneasyequilibrium in their fiscal systems that reflects the balance of politicalforces and institutions and remain at this position until shocked into anew equilibrium (Bird, Martinez-Vazquez, and Torgler 2006). Withoutunderstanding the underlying political governance determinants of thisequilibrium, reforms are unlikely to solve technical problems in the taxsystem, such as those identified by Le, Moreno-Dodson, and Rojchaichaninthorn(2008, 16): “tax policies riddled with overly complex structuresand multiple—largely ad hoc—incentives that narrow the alreadylimited tax base, create more loopholes for tax avoidance and evasion,intensify the public perception of unfairness of taxes, and generateopportunity for corruption.”As a result, tackling tax evasion is a problem of collective action:funding adequate public goods depends on the discount rates or timehorizons of rulers and taxpayers, on the transaction costs involved, andon relative bargaining power (Paul, Miller, and Paul 2006). Intra- andcross-country variation in tax effort and tax-GDP ratios indicates differencesnot only in the economy or in levels of development or inregime type, but also in the political will to tackle the collective actionproblem (Bird and Zolt 2007; Cheibub 1998). 44 This applies in developed-and developing-country contexts. 45 So, although low-tax countriestend also to have lower income per capita, there are significantvariations in tax effort and tax-GDP ratios. Zambia, for example, had aper capita income of US$785 in 2003 and collected 18.1 percent of GDPin tax, whereas Uganda had a per capita income of US$1,167 but collectedonly 11.4 percent of GDP. Indonesia, with a gross national prod-