Editor’s note: The findings, interpretations and conclusions expressed herein are those of the authors and do not necessarily reflect the view of the World Bank Group, its Board of Directors or the governments they represent.
For business, the conversation around tax and sustainable development can be tough. Yet
Taxation plays a fundamental role in effectively raising and allocating domestic resources for governments to deliver essential public services and achieve broader development goals.
A central question in development economics is how to fund public goods. Informal taxation, whereby households make direct contributions to local public goods (such as water resources, roads and schools) outside of the formal tax system, is an important source of funding for public goods in many low-income countries, especially Kenya (Olken and Singhal 2011, Ngau 1987, Barkan and Holmquist 1986). Informal taxes are coordinated and collected by local leaders and enforced via social sanctions rather than the state. In a formal tax system, legal statutes dictate how taxes change with household income. But how does informal taxation respond to changes in household income?
My job market paper first quantifies informal taxation in Kenya. Using household panel data, I estimate informal tax schedules over the income distribution and test whether informal taxes respond to changes in earned income. Second, I estimate how informal taxation and public goods respond to a large, one-time increase in income from a randomized unconditional cash transfer program targeting poor households.
This is the seventh in this year’s job market series.
Developing countries regularly underperform in their capacity to collect taxes, with tax revenue to GDP ratios that are 20 to 30 percent less than those of high-income countries (Besley and Persson, 2014). This tax capacity gap represents lost revenue that could have provided much-needed public goods and services while reducing reliance on foreign aid. This issue is especially relevant in Africa, where “shadow economies” comprise up to 75% of national GDP (Schneider and Enste 2000), indicating that large swaths of these countries’ populations manage to evade taxation. What accounts for this failure to convince citizens to pay taxes?
Structural roadblocks to tax collections in developing countries include poor service quality, dysfunctional bureaucracies, and outdated equipment. In contrast, my job market paper provides a political explanation centered on clientelism, or politicians' exchange of targeted goods for votes from loyal supporters.
This is the first in this year’s series of posts by PhD students on the job market. Reminder that submissions close this Wednesday at noon.
Good political institutions are thought to be essential for sustained economic development (Acemoglu et al., 2016). But where do inclusive, accountable institutions come from? One prominent explanation centers on taxation (Schumpeter, 1918; Besley and Persson, 2009, 2013). Historically, when states began systematically taxing their populations to pay for wars, citizens protested fiercely, demanding public goods and political rights: “no taxation without representation.” This process triggered the co-evolution of tax compliance, citizen participation in politics, and accountable governance. Today, policymakers often promote taxation in developing countries to jumpstart this same virtuous cycle. “Bringing small businesses into the tax net,” writes the IMF, “can help secure their participation in the political process and improve government accountability” (IMF, 2011).
These are some of the views and reports relevant to our readers that caught our attention this week.
Populists and Autocrats: The Dual Threat to Global Democracy
In 2016, populist and nationalist political forces made astonishing gains in democratic states, while authoritarian powers engaged in brazen acts of aggression, and grave atrocities went unanswered in war zones across two continents. All of these developments point to a growing danger that the international order of the past quarter-century— rooted in the principles of democracy, human rights, and the rule of law—will give way to a world in which individual leaders and nations pursue their own narrow interests without meaningful constraints, and without regard for the shared benefits of global peace, freedom, and prosperity. The troubling impression created by the year’s headline events is supported by the latest findings of Freedom in the World. A total of 67 countries suffered net declines in political rights and civil liberties in 2016, compared with 36 that registered gains. This marked the 11th consecutive year in which declines outnumbered improvements.
Financial Flows and Tax Havens: Combining to Limit the Lives of Billions of People
Global Financial Integrity
Global Financial Integrity (GFI), the Norwegian School of Economics and a team of global experts released a study showing that since 1980 developing countries lost US$16.3 trillion dollars through broad leakages in the balance of payments, trade mis-invoicing, and recorded financial transfers. These resources represent immense social costs that have been borne by the citizens of developing countries around the globe. Funding for the report was provided by the Research Council of Norway and research assistance was provided by economists in Brazil, India, and Nigeria. Titled “Financial Flows and Tax Havens: Combining to Limit the Lives of Billions of People,” the report demonstrates that developing countries have effectively served as net-creditors to the rest of the world with tax havens playing a major role in the flight of unrecorded capital. For example, in 2011 tax haven holdings of total developing country wealth were valued at US$4.4 trillion, which exacerbated inequality and undermined good governance and economic growth.
What would you expect in a mineral rich developing country? High Government revenues from the mineral resources? Not always, and definitely not in the case of Zambia - until recently.
Zambia has a considerable wealth of mineral resources and its economy depends heavily on these minerals. Zambia's primary export, copper and copper-related products, account for as much as 77% of the country's exports.
The recent decline in global commodity prices is proving to be very costly for South Africa. The deterioration of South Africa’s terms of trade since 2012 cost at least four percentage points of gross domestic product (GDP) growth. This estimate does not account for some important indirect effects generated by the commodity price shock, including the heightened volatility of the rand and its impact on investment decisions. Instead of global monetary policy developments, commodity price volatility is now understood as being the main driver of exchange rate and capital account volatility in South Africa, and in emerging markets more generally. And 91% of European investors surveyed in the second half of 2014 identified the volatility of the rand as a major constraint to doing business in South Africa.