draining development.pdf - Khazar University

72 Draining Developmentgovernance is central to the problem of illicit capital flows, tackling theflows requires more than technocratic solutions. Domestic and internationalefforts to contain illicit capital flows must include building statelegitimacy through a locally credible political vision for sustainable development.It concludes that the key policy concern in attempts to controlillicit capital flows must be how to create the political interests and institutionalincentive structures so that political leaders and elites will tax themselves,thereby curtailing the potential benefits from those forms of illicitcapital flows that may currently be funding their grip on power.Effective states tackle illicit capital flowsWhere poor political governance reflects and exacerbates political insecurity,significant illicit capital flight may occur. Any modern state that isnot a tax haven or an oil exporter requires resourcing through an effectivetax system capable of constraining tax evasion. The state also requiresperceived legitimacy so that taxpayers and citizens in general do notregard illegal capital outflows as licit, that is, as morally legitimate. Yet,many developing states are highly aid dependent and lack legitimacyin the eyes of their citizens; so, they need to strengthen their tax baseand the willingness of their citizens to pay taxes (Chabal and Daloz1999; Everest-Phillips 2011). Overcoming this development conundrumrequires recognition that politics shape both the root cause and thepotential solution. Tax systems, which comprise legislation, policy, andadministration, are part of this, reflecting the national consensus on collectiveaction, through the political process, for resourcing essential publicgoods such as security, rule of law, and the provision of basic services(Timmons 2005). Taxation reflects the intrinsic legitimacy of the state(based on consent, manifested among taxpayers as tax morale, theirinherent willingness to pay taxes) and funds the effectiveness of stateinstitutions (manifested in actual compliance). 7The extent of tax evasion thus provides a good indicator of the comparativequality of governance. 8 The state cannot function without revenue;how that revenue is raised (the balance between coercion and consent)mirrors the relationship between society and the state, but alsoshapes it: tax is state building in developing countries (Bräutigam, Fjeldstad,and Moore 2008; Everest-Phillips 2008a, 2010). 9 While the size andstructure of a country’s economy significantly influence the types and