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Tax and government
I sympathise with the Tax Justice Network’s aims, but I think their latest publication may have got the relationship between tax and good government (found via Richard Murphy’s blog) wrong. I also think I can explain why there is so little pressure to improve tax collection.
They suggest that getting people to pay tax makes governments more democratic and more effective. I think the relationship runs the other way, so good gevernments can collect more tax:
- If tax collectors are corrupt, people pay less tax.
- If tax collectors are inefficient, people pay less tax.
- If taxes are spent on what people want (democratically) they are more willing to pay. They can even feel good about paying tax (found via PSD blog).
- If governments are corrupt people are less willing to pay tax: there is a big difference between paying tax that goes to build a hospital, and paying tax that pays for the health minister to buy a jet.
Of course the Tax Justice Network is right that there is a correlation, and undoubtedly some causal relation, but it is not easy to prove which way the causality runs.
The same publication also discusses why donor countries are so reluctant to pressure developing countries to improve their tax. It mentions that donors deliberately avoid the issue. I can suggest some reasons why:
- Tax collection cannot be improved without strengthening institutions. People running poor countries are usually quite happy with weak insitutions that give them more personal power and wealth. They will resist change.
- Those who dodge their tax, frequently do so by keeping money offshore (from their home country’s point of view), investing it in developed countries.
- Big business in rich countries gains by avoiding tax in poor countries.
- Tax revenues in rich countries are boosted by both the returns on the extra investment, and the higher taxable profits created by manipulating transfer pricing.
In short, its not their problem, why should they bother? The similarity between these two problems is that things are the way they are, because of the people who want them to be that way.
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