draining development.pdf - Khazar University

70 Draining Developmentillicit capital flows, including tax evasion, the weak legitimacy of the statein many developing countries must be addressed. If regime leaders andelites are not prepared to tax themselves and prevent free-riding, genuinepolitical ownership of efforts to curb illicit capital flows is problematic.Introduction: Effective States, Tax Evasion,and Illicit Capital FlowsThe G-8 world leaders, meeting in July 2009, recognized “the particularlydamaging effects of tax evasion for developing countries.” 1 Effectivestates require effective, efficient, and equitable tax systems. Creating thecommitment of citizens not to evade taxation is a political process centralto state building; cajoling elites to pay taxes has always been anessential step to any state becoming effective. Bad governance manifestsitself through an unjust tax system and rampant tax evasion (the illegalavoidance of paying taxation) (Everest-Phillips 2009a). 2 Throughouthistory, tax has been a symbol of state authority; tax evasion an indicatorof political resistance. 3 Tax evasion is significantly correlated with dissatisfactionwith government, political interference in the economy, andweak governance (see, respectively, Lewis 1982; Kim 2008; Hayoz andHug 2007). In modern times, widespread tax evasion remains a triggerfor and indicator of political instability. 4 Political and economic malaiseintertwine. For instance, after the Tequila Crisis in Mexico, tax evasionincreased from 43 percent of the total take in 1994, to 54 percent in 1995,and to 59 percent in the first half of 1996. 5Political economy definition: Flight or flow? Illegal or illicit?Considerable confusion has arisen in the nascent literature on illicit capitalflows from the failure to develop conceptual clarity between capitalflight and capital flows and between illicit and illegal. To establish cleardefinitions requires recognition that effective, legitimate states are crucialfor development (DFID 2006). Illicit indicates that the activity isgenerally perceived as illegitimate, which, in turn, requires the state to beregarded as legitimate. International capital transfers become illicit ifthey originate from an illegal source (evasion, corruption, or criminality)or are illegal by bypassing capital controls, but also immoral inundermining the state’s willingness and capacity to deliver better lives