draining development.pdf - Khazar University

262 Draining Development?financial intermediation) is even more strongly affected by an increase in taxrates, and the tax elasticity for this sector is around −3.• By weighing sector-specific elasticities with the sector’s share of total FDI, weobtain an average tax elasticity of −2.5. This average tax elasticity is comparableto the results derived in more aggregated studies.25. In fact, the statutory tax rates in the most economically significant developingcountries tend to be lower than the average in OECD countries (Gordon and Li2009).26. See World Development Indicators (database), World Bank, Washington, DC,http://data.worldbank.org/data-catalog/world-development-indicators/. Economistscontend that these differences in revenue collection can be explained byboth (a) the fact that demand for public services increases more than proportionallyas income rises and (b) weaknesses in the ability of developing countriesto raise the revenue required for the provision of adequate public services. Onthe latter, the World Bank (2004) emphasizes the narrowness of the tax base andproblems in tax administration.27. World Bank (2004) reports that the only exception to this outcome was theregion of Central and Eastern Europe and Central Asia, where revenues fellbecause of privatization and a general contraction in the size of the state.28. Fuest and Riedel formulate the issue as follows:Attempts to estimate the amount of tax avoidance and tax evasion thereforehave to build on concepts which exploit correlations between observableand statistically documented variables and evasion. These data problemsmay explain why there is very little reliable empirical evidence on taxavoidance and evasion in developing countries. The existing studies mostlyrely on highly restrictive assumptions and have to make use of data ofmixed quality. (Fuest and Riedel 2009, 6)29. For example, see Fuest and Riedel (2009); GAO (2008); McDonald (2008).30. We adopt the view that, in the presence of an international tax regime, countriesare effectively constrained to operating in the context of that regime and not freeto adopt any international tax rules they please. This view is espoused in Avi-Yonah (2007). The basic norms that underlie this international tax regime arethe single tax principle (that is, that income should be taxed once, no more norless) and the benefits principle (that is, that active business income should betaxed primarily at the source and that passive investment income should betaxed primarily at residence).31. For a discussion on the role of information sharing in international taxation, seeKeen and Ligthart (2004), who consider that this form of administrative cooperationmay be a feasible substitute for the difficult-to-achieve target of thecoordination of tax systems.32. For a strong argument on the role of advance pricing agreements and tax treatiesin improving the current international tax regime, see Baistrocchi (2005).