draining development.pdf - Khazar University

Introduction and Overview: The Dynamics of Illicit Flows 9other dimensions of illicit flows: criminality and corruption) requirespolitical incentives to build an effective state. An effective state includeseffective tax systems, which derive from formal and informal institutionalarrangements (political settlements) that establish the ambition to promoteprosperity and raise public revenue. Such a commitment arises ifpolitical leaders and taxpayers perceive the need for effective tax systemsso as to provide the state with the resources required to enforce propertyrights, deliver political stability, and promote economic growth. Theextent and the form of tax evasion derive from the political consensus totax effectively and to develop the administrative capacity to do so. In turn,this shapes and reflects the intrinsic willingness to pay taxes (tax morale)of taxpayers. The political economy of controlling illicit capital flows,including tackling tax evasion, demonstrates the necessity of addressingineffective governance and the weak state legitimacy of many developingcountries. If regime leaders and elites are not prepared to tax themselvesand prevent free-riding, genuine political ownership of efforts to curbillicit capital flows will be problematic.In chapter 4, Clemens Fuest and Nadine Riedel, economists at OxfordUniversity, assess tax evasion and avoidance in developing countries andthe role of international profit shifting, which may serve as a channel forillicit financial flows. They begin, as does Volker Nitsch in chapter 10, byexpressing skepticism about the existing estimates of the extent of taxlosses to developing countries that occur as a result of the movement ofcapital from developing countries to tax havens. The available data arelimited, and estimates reflect broad assumptions, often selected in a waythat generates high estimates. For example, it is often assumed that thecapital would, if kept at home, pay the full tax rate, even though there arenumerous loopholes that allow corporations to incur much lower taxobligations.Empirical evidence on the magnitude of the problem and on thefactors driving income shifting is scarce and confined to studies ofde veloped nations. Fuest and Riedel discuss methods and available datasets that can be used to gain new insights into the problem of corporateincome shifting. The authors argue that the results of many existingstudies on tax evasion and avoidance in developing countries are difficultto interpret, mainly because the measurement concepts used have anumber of drawbacks. They discuss alternative methods and data sets