DFID Research: Do taxes help make better governments?
Taxation has the potential to increase the capability, accountability and responsiveness of the state.
Governance appears to be better where governments have to earn their incomes by taxing a wide range of citizens and economic activities.
Researchers from the DFID-funded Centre for the Future State based at the Institute of Development Studies, and researchers in Ghana, South Africa, Brazil, Indonesia and a range of other middle income countries mainly in Latin America have been using contemporary and historical evidence to investigate exactly how the accountability and effectiveness of states depend on the nature of the tax relationship between a government and its people.
Their findings suggest that the requirement for governments to bargain with their citizens over tax, and to set up the administrative machinery to collect it, have the potential to increase the capability, accountability and responsiveness of the state. Well-managed taxation systems can play a major role in state building.
Conversely, where governments obtain their revenue from sources other than tax - notably oil, gas, other natural resource exports, and aid - they may have little incentive to negotiate with citizens or spend revenue wisely. The outcome is often weak states, and bad governance. Unearned incomes are often very significant for the governments of many poor and middle-income countries.
These results have been widely reported, leading to the issue of taxation and governance featuring on the agenda of a growing number of organisations including DAC, the World Bank and the IMF. Findings have attracted the interests of tax experts and other policymakers with the capacity to take practical action.