draining development.pdf - Khazar University

The Political Economy of Controlling Tax Evasion and Illicit Flows 9729. The Guatemalan government has attempted in recent years to address theseproblems, not least through the Anti-Evasion Law of 2006 (World Bank data of2007).30. Thus, under Menem, sanctions against evasion were strengthened, and the temporaryclosures by the tax authorities of the business premises of enterprisesthat failed to register for the VAT or to issue invoices rose from 751 in 1990 to5,021 in the first nine months of 1991. However, this momentum subsequentlylapsed; see Morisset and Izquierdo (1993).31. This, for example, seems to apply to recent Chinese illicit capital flows in roundtrippingto benefit from tax incentives that have existed for foreign investment.32. For this reason, tax havens require good governance, which is often provided orguaranteed by the countries of the Organisation for Economic Co-operationand Development by proxy (for example, Monaco through France) or as coloniesor crown dependencies (for example, Isle of Man by the United Kingdom)(Dharmapala and Hines 2006). This centrality of the quality of governance mayalso help to explain why high-tax countries remain high tax, and low-tax countriesremain low tax (Markle and Shackelford 2009).33. Across Africa, for instance, Keen and Mansour (2008) note that improvementsin tax-GDP ratios in recent years have been, overall, almost entirely the result ofrising commodity prices.34. A working paper on state building published by the U.K. Department for InternationalDevelopment (Whaites 2008, 4) defines political settlements as “theforging of a common understanding, usually among elites, that their interests orbeliefs are served by a particular way of organizing political power.”35. Bratton and van de Walle (1997) assert that neo-patrimonial regimes in Africahave a cultural system of the quasi-taxation of fiscal-type obligations to theextended circle of family, friends, and tribal chiefs, thereby complicating the ideathat evasion arises from governments acting as self-serving Leviathans ratherthan as maximizers of social welfare.36. Virmani (1987) points out that higher penalties for evasion could reduce taxrevenues by making collusion between taxpayer and tax collector more profitableunless penalties for corruption are strengthened and their implementationis given full political backing.37. Fjeldstad and Tungodden (2003) argue that discretion and fiscal corruptioncontribute to undermining the legitimacy of the tax administration and therebyincrease tax evasion.38. By contrast, Mahon (2004) finds that tax reform is predicted by the politicaldrive of new administrations, more authoritarian-leaning elected governments,the dominance of the president’s party in the legislature, established electoralsystems, closed-list proportional representation, less polarized party systems,and more numerous parties.39. For example, the political settlement requires regional taxpayers to trust thestate to redistribute fairly (Ndulu et al. 2007).