draining development.pdf - Khazar University

The Political Economy of Controlling Tax Evasion and Illicit Flows 75bribes by public officials, whereby political insecurity is so endemic thatoutflows are institutionalized; rent-scraping, or political manipulation toproduce rents, thereby allowing the scraping off of these rents by publicofficials so that short-term political gain drives outflows; and dividendcollecting,or transfers of a predictable percentage of the profits earned byprivate enterprises to government officials. Under this last political context,the longer-term consensus on development generates the politicalsecurity that is essential to constrain outflows.These different dynamics result in the wide variations in the effectivenessof tax systems. In a looting context such as Zaire under Mobutu,minimal taxation and endemic tax evasion reflected the failure to buildthe state capacities required to enforce property rights, and the politicalsettlement collapsed. In a rent-scraping environment such as the Philippinesunder Marcos, the tax system was weak, and tax evasion was widespreadand increasing; the ratio of taxes to GDP fell from 12.0 percent in1975 to 9.6 percent in 1984 as political support for the dictatorship collapsed(Manasan and Querubin 1987). The first finance minister of thepost-Marcos Aquino government later noted that “every successful businessman,lawyer, accountant, doctor, and dentist I know has some formof cash or assets which he began to squirrel abroad after Marcos declaredmartial law in 1972 and, in the process, frightened every Filipino whohad anything to lose” (Boyce and Zarsky 1988, 191). A return to formaldemocracy did little to alleviate the problem, however, and, a decadelater, the politics of vested interests in the Philippines continued as rentscraping,in which “tax avoidance and evasion are evidently largely theprovince of the rich” (Devarajan and Hossain 1995).In these rent-seeking contexts, economic opportunities and politicalorder are created and maintained by limiting access to valuable resources(North et al. 2007; North, Wallis, and Weingast 2009). Limited access to thelooting of state assets, rent seeking, corruption, criminality, and ease of taxevasion creates the political incentives in any regime to cooperate with thegroup in power. 14 Access to illicit capital flows and tolerance of tax evasionform part of this rent and are distributed to solve the problem of endemicviolence and political disorder. The regime, lacking a broad elite coalitionfor long-term development, may tacitly or expressly allow the “winningcoalition” of its power base to evade tax, while trying to constrain openaccess to the illicit capital flows and to tax evasion that would undermine