draining development.pdf - Khazar University

The Political Economy of Controlling Tax Evasion and Illicit Flows 73yield of the taxes that can be collected, the root cause of weaknesses intax systems in many countries is ultimately not a limited economy, poortax policy, or capacity constraints in tax administrations (Stotsky andWoldeMariam 1997). Rather, the problem is that taxation reflects politicalattitudes toward the state and the type of state that taxation shouldfund. 10Tax evasion and the potential illicit capital flows arising from it thereforeflourish if there is a lack of political determination to build the legitimacyof the state needed to make taxation effective and deliver development(Therkildsen 2008; Everest-Phillips 2009a). 11 For example, acrossAfrica, the postindependence collapse in governance was reflected in taxevasion: thus, in Malawi, tax evasion increased sevenfold between 1972and 1990. 12 Corruption also flourished as the state became the vehiclefor personal enrichment by the elite, and the state’s challenged legitimacyencouraged institutionalized criminality (Bayart, Ellis, and Hibou1999).As a result of such dynamics, containing all forms of illicit capitalflows requires building state legitimacy and improving political and economicgovernance. Empirical data consistently confirm the importanceof the perceived quality of governance for tax compliance. Public perceptionof high levels of corruption, for example, is associated with highlevels of tax evasion; this is both cause and effect given that higher levelsof corruption lower the ratio of taxes to gross domestic product (GDP)(Rose-Ackerman 1999; Ghura 2002). Tax compliance does not dependsolely or probably not even largely on a taxpayer’s analysis of cost, benefit,and risk of evasion (Alm and Martinez-Vazquez 2003). Instead, taxpayersevade and illicitly move capital abroad not simply because thepotential benefit outweighs the perceived risk, but because they believethe state lacks the legitimacy of capable, accountable, and responsivegovernance (Steinmo 1993).Indeed, in the face of rampant corruption, criminality, and waste inthe public sector, tax evasion is seen as legitimate (Tanzi and Shome1993). Widespread tax evasion indicates a lack of tax effort: the statelacks the will to engage with its citizens, and citizens do not believe theirinterests coincide with those of the state. The fiscal social contract—namely, a credible commitment among leaders, elites, and citizens to payfor and deliver sustainable national development—does not exist. The