State-building Taxation for Developing Countries: Principles for Reform
(i) Political inclusion: paying taxes gives citizens a powerful incentive to engage with government and the political process. Democracy is thus stronger and more effective in states where a higher proportion of people pay taxes and vested interests do not ‘capture’ the state. This matters across the whole state; its territorial reach is essential to state-building, since the tax systems of sub-national government are frequently highly coercive.
(ii) Accountability and transparency: the usage of tax revenues is justified to taxpayers, who demand to know if tax revenues are properly used.
(iii) Perceived fairness: within a strong tax system, taxpayers perceive that they are treated equally and justly by the state. Perceptions of unfairness, such as failure to address widespread tax exemptions or the informal economy, limit both revenue and ‘willingness to pay’.
(iv) Effectiveness: the administrative capability that translates increased public revenues into better public goods, more capable government, and increased political stability.
(v) Political commitment to shared prosperity: successful state-building demands political leadership with a vision of tax as delivering a ‘national purpose’ that actual and potential taxpayers will support (and pay for). The tax-system component of the state-building effort must explicitly link to a national strategy for promoting economic growth.
(vi) Legitimisation of social norms and economic interests: the state through the fiscal system can convey official recognition of social and economic institutions such as marriage and property rights. This in turn can be highly significant in motivating citizens to support the legitimacy of the state.10
(vii) Effective Revenue-raising: Effective states need adequate resources for providing the physical security, property rights and effective contract enforcement needed to deliver economic growth and the welfare systems that secure political stability.
The full paper is here.