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Thursday, 1 April 2010

Democracy and tax revenues

A new paper assesses the relationship between the level of democracy and scale of tax revenues. We can expect the relationship between the two because greater democracy should lead to greater checks and balance on the Executive, leading to the reduction in the government's propensity to cave in to special interests :

We find strong evidence that the political regime in a country does influence the extent to which domestic tax reforms are implemented and higher domestic tax revenues achieved. The estimated effect of increased democracy on tax revenue is quite large and it is the level of constraints on the executive that seems to be the driving force behind the result. Increased checks and balances are needed to counter the propensity of governments to cave in for special interests and to be less social welfare minded. High levels of democracy are specifically needed in natural resource rich countries to make natural resource rents contribute to higher domestic taxes revenues and no longer be an impediment to a sustained tax system for financing public goods. These findings highlight the presence of political economy factors which seriously need to be taken into consideration in the design of domestic tax reforms. 
It is hard to argue with these findings when one looks at our own predicament. It is no surprise that mining tax reforms where pushed at a period many associated with the serious pursuit against corruption and greater belief in the government's democratic mandate. That we derive so little benefit from our copper is not just a statement about our economic management, but the absence of a clear democratic dispensation. According to the evidence gleaned from the paper, it would not be far-fetched to say our mining policy is "captured".

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