draining development.pdf - Khazar University

The Political Economy of Controlling Tax Evasion and Illicit Flows 71for its citizens. (For simplicity, we treat illicit here to mean immoral andillegal, but there also exist potentially immoral, but not illegal capitalflows, such as those arising from aggressive tax avoidance.) Flight indicatesexit from risk; flow is simply a movement of liquid financial assets.By this definition, illegal capital flight is the rational, but unlawful, shiftof assets away from high to low political risk, whereas illicit capital flowstake place by choice despite a state’s political legitimacy evinced by acredible commitment to development in the national interest (table 3.1).The frequent conflation of illicit and illegal loses the important moraldimension for developing countries and their partners in the internationalcommunity of the need to tackle poverty and deliver the UnitedNations’ Millennium Development Goals.The three main drivers of illicit capital flows—tax evasion, corruption,and criminality—are, at once, both causes and effects of the fragilityof state institutions and, so, challenge perceived legitimacy. Tax evasionundermines the funding of the state and, thus, the legitimacyassociated with the state through the delivery of public services; corruptionweakens the moral legitimacy of the state; and criminality challengesthe legitimacy of state authority. However, while the rationale forthe illicit capital flows driven by these factors is clear, the relative importanceof these factors in different contexts and the connections betweenthem remain uncertain and unquantified. 6This chapter outlines the political economy of the apparently mostcommon and undoubtedly most politically complex and significant ofillicit flows, the flows linked to tax evasion. It argues that, because politicalTable 3.1. Proposed Typology: Illegal and Illicit Capital Flows and Capital FlightCapital movement Illegal IllicitCapital flow (from greed)Capital flight (from risk)Source: Author compilation.Unlawful asset transfer to hidewealth from the stateUnlawful asset transfer from apoor to a good governancecontext to reduce political risk(for example, from arbitraryautocratic rule)Asset transfer that immorallyundermines a legitimate state’scapacity and commitment todevelopmentImmoral asset transfer toreduce exposure to political risk(for example, from nascentdemocracy)