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Managing public expenditure

How does taxation affect the quality of governance? (pdf 410kb)

This working paper summarises the policy implications of a growing debate about the connection between taxation and the quality of governance in developing countries. In particular, it focuses on two sets of policy questions about this relationship. The first relates to governments that do not need to make much tax effort, and the second, to coercive taxation.

Key findings discussed in the document include the following:
- Many governments do not need to make much tax effort because they have large non-tax incomes from oil, gas and mineral exports or from foreign aid
- State elites are financially independent of citizen-taxpayers - this changes the political incentives that they face, and the ways in which they seek to obtain, use and retain power
- The dependence of governments on general taxation has positive effects on the quality of governance
- It cannot be assumed that governments, because they are fully dependent on taxation for revenues, will be capable, accountable, or responsive
- Establishing more consensual taxation practices is an important route towards improved governance
- Aid donors could play a more constructive role.

 

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