draining development.pdf - Khazar University

74 Draining Developmentpopular Russian attitude toward tax evasion exemplifies the relevantpolitical context found in many developing countries, as follows: 13First, [Russian citizens] rightly did not believe that all “the other” taxpayerswere paying their taxes properly, so it was really no point in being “theonly one” who acted honestly. The goods (public, semi-public or private)that the government was going to use the money to produce would simplynot be produced because there were too little taxes paid in the first place.Secondly, they believed that the tax authorities were corrupted, so thateven if they paid their taxes, a significant part of the money would neverreach the hospitals or schools, etc. Instead, the money would fill the pocketsof the tax bureaucrats. (Rothstein 2001, 477)Thus, tax evasion creates a vicious circle: the perception that othersare not paying tax drastically reduces compliance and delegitimizes thestate, fueling both capital flight and capital flows. So, for example, theprivate assets held abroad by Venezuelan citizens more than doubled,from US$23 billion to US$50 billion, between 1998 and 2005 as a resultof widespread tax evasion and capital flight arising from the collapse ofthe political legitimacy of the state as perceived by taxpaying citizensunder the divisive populist politics of Chavez’s Bolivarian Revolution(Di John 2009). Only if the state formulates an inclusive vision for economicgrowth and development that is politically credible with a broadbase of taxpayers and holders of capital, as well as the wider electorate,does rational capital flight from governance risk become illicit capitalflow, that is, an immoral undermining of the state’s commitment to povertyreduction, sustainable economic growth, and long-term politicalstability.Evasion into illicit outflows: Looting, rent-scraping,and dividend-collectingIllicit international capital transfers require three drivers: (1) opportunity,particularly facilitated by globalization; (2) pull, that is, attractionto more effective governance contexts with less political risk (flight); and(3) push, that is, the lack of a credible domestic commitment to development(flows). Wedeman (1997) distinguishes three political economiesthat convert tax evasion into capital flight and outflows: looting, or uninhibitedplundering or systematic theft of public funds and extraction of