draining development.pdf - Khazar University

3The Political Economy ofControlling Tax Evasionand Illicit FlowsMax Everest-PhillipsAbstractThis chapter examines illicit capital flows from developing countriesthrough analysis of one major component of the problem, tax evasion.The political economy definition put forward in the chapter clarifies thatthe root cause of all illicit capital outflows is ultimately not poor policy orcapacity constraints in administration, but the failure of political will. Taxevasion and the other major sources of illegal flows (criminality and corruption)flourish in the absence of the political ambition to build a legitimate,effective state. Such effectiveness, including the effectiveness of taxsystems, derives from formal and informal institutional arrangements(political settlements) that establish state legitimacy, promote prosperity,and raise public revenue. The commitment to these arrangements distinguishesillicit from illegal. It requires that political leaders and taxpayersperceive the need for effective tax systems to provide the state with theresources necessary to enforce their own property rights, deliver politicalstability, and promote economic growth. The extent and form of tax evasionderive from the political consensus to tax effectively and develop theadministrative capacity to do so. This, in turn, shapes and reflects theintrinsic willingness to pay taxes (tax morale) of taxpayers. To contain69