Abstract
The central question in taxation plus development is: “how does a government go from raising around 10% of GDP in taxes to raising around 40%?” This paper looks at the economic plus political forces that shape the way that fiscal capacity is created plus sustained. As well as reviewing the literature plus evidence, it builds an overarching framework to help structure thinking on the topic.
Introduction
Perhaps more than any other economist in the post-war generation, Nicholas Kaldor appreciated the centrality of public finance to development. Following his lead, we believe that the power to tax lies at the heart of state development. A moment’s reflection on the history of today’s developed countries plus the current situation of today’s developing nations suggests that the acquisition of that power cannot be taken for granted. The central question in taxation plus development is: “how does a government go from raising around 10% of GDP in taxes to raising around 40%?”
In the process of development, states not only increase the levels of taxation, but also undergo pronounced changes in patterns of taxation, with increasing emphasis on broader tax bases, i.e., with fewer exemptions. Some taxes—notably trade taxes—tend to diminish in importance. Thus, in the developed global taxes on income plus value added do the heavy lifting in raising sufficient revenue to support the productive plus redistributive functions of the state.
The power to tax is taken for granted in most of mainstream public finance. Traditional research focuses on limits imposed by incentive constraints tied to asymmetric information, or sometimes political motives, rather than the administrative capabilities of the state. Thus, public finance plus taxation remains a relatively unexplored field. However, this is now changing with a better understanding of the issues at a macro level plus a range of efforts to collect micro data, some of it based on policy experiments. In part, this reflects a growing insight among policymakers that a better working tax system helps the state to support economic development.
Governments in all parts of the global plus at all points in history have faced similar challenges when it comes to funding their ambitions. We do not believe that governments in the past or in today’s developing global are any less rational or farsighted compared to those in today’s developed world. But they may face incentives plus constraints shaped by weakly institutionalized political environments. A key challenge for the study of taxation plus development is to understand how these incentives plus constraints work, plus how—if at all—the situation might be improved for the citizens in today’s developing nations.