draining development.pdf - Khazar University

The Political Economy of Controlling Tax Evasion and Illicit Flows 93term building of an effective state (Fjeldstad and Moore 2009). Tax isconditional on political performance:The quality of political institutions has a strong observable effect on taxmorale . . . not only the overall index, but also the sub-factors of voice andaccountability, rule of law, political stability and absence of violence, regulatoryquality and control of corruption exercise a strong influence ontax morale. Moreover, trust in the justice system and the parliament alsohas a highly significant positive effect on tax morale. (Torgler, Schaffner,and Macintyre 2007, 23)In other words, every political system constantly struggles to maintainits fiscal legitimacy:The achievement of significant quasi-voluntary compliance within a populationis always tenuous . . . free riding, once begun, is likely to increase.Once quasi-voluntary compliance has declined, it is extremely difficult toreconstitute. Its reestablishment often requires an extraordinary event—such as war, revolution, or depression—that makes people willing tonegotiate a new bargain. (Levi 1989, 69–70)So, tax evasion and the resulting illicit capital flows must be tackled bystrengthening the legitimacy of the state in the eyes of current andpotential taxpayers. There is evidence in some developing countries,such as Ghana, Indonesia, and Zambia, that, through the messy processof democratic politics, this is happening (Pritchard 2009; Heij 2007; vonSoest 2006).ConclusionFurther research is undoubtedly needed to understand the relativeimportance and interconnection of tax evasion, corruption, and criminalityin driving illicit capital flows in different contexts, but it is clearthat tackling the problem will require building effective states responsiveto the needs of their societies. Currently, there does not appear to be reliabledata on the level of illicit capital that flows South-South or South-North. What we do know is that the governance reforms needed to buildeffective states and to reduce illicit capital outflows require strong politicalcommitment. Such commitment develops if political institutional