IMF paper points to 'no taxation without representation' aspect of Resource Curse

A new Working Paper from the IMF notes in its abstract:

This paper asks whether the availability of higher resource revenue in these countries has led to lower taxation effort of other revenue categories. The question is analyzed both in terms of the relationship between non-resource tax revenue and resource revenue, and between non-resource tax revenue and statutory tax rates. The paper finds evidence suggesting that nonresource revenue is negatively influenced by a higher resource revenue-to-GDP ratio. The lower take up of nonresource taxes in resource-rich countries is correlated with higher levels of corruption in these countries, suggesting weaker institutions affect nonresource revenue through incentives for tax evasion and/or large tax exemptions as argued in the literature.

No great surprise there, but it's always useful to get confirmation of things. In short, wading through the IMF-speak, the researchers have found that countries rich in natural resources tend to see weaker efforts to raise taxes from other sectors, and this lack of tax 'effort' is correlated with greater corruption. This is an important driver for the so-called Resource Curse, a phenomenon that appears surprising on the face of it: countries rich in natural resources often perform worse than their resource-poor peers.

We have long pointed out that there are important links between taxes and representative, accountable government. As a 2008 book on the subject summarises:

"The political importance of taxation extends beyond the raising of revenue. We argue in this book that taxation may play the central (their emphasis) role in building and sustaining the power of states, and shaping their ties to society. The state-building role of taxation can be seen in two principal areas: the rise of a social contract based on bargaining around tax, and the institution-building stimulus provided by the revenue imperative. Progress in the first area may foster representative democracy. Progress in the second area strengthens state capacity. Both have the potential to bolster the legitimacy of the state and enhance accountability between the state and its citizens."

In an article for Tax Justice Focus a while back, Alex Cobham explored some further benefits from taxation, through what he calls the "Four Rs"

• Revenue. Raising money for schools, hospitals, courts etc.
• Redistribution. Spreading the benefits of development more widely.
• Repricing. Tax can change behaviour: high taxes on tobacco, for instance, can discourage its use.
• Representation. It is this fourth "R," of course, that is the key issue of this blog. Taxation strengthens and protects channels of political representation: when citizens are taxed, they demand representation in return from their rulers. Mick Moore's article in that edition of Tax Justice Focus has more .

The 2008 book also mentioned, however, this:

This idea is largely missing from the new scholarship on state-building. It is also largely missing from the practical concerns of those working in the aid community. The lack of attention to the relationship between revenue-raising and governance is surprising, especially given the long-standing linkage between taxation and governance assumed by students of European and American history.

So it's good to see the IMF paper contributing to a still relatively sparse field. Those interested in this general 'no taxation without representation' area are now encouraged to visit this research site. Their core messages are summarised:

"The ways in which governments are funded has very significant impacts on the quality of governance:

Governance is better where governments have to earn their incomes by taxing a wide range of citizens and economic activities. It is worse where governments can rely on large unearned levies on the proceeds of exporting oil, gas and concentrated mineral deposits. These unearned incomes are very significant for the governments of many poor and middle income countries.

Conversely, well-managed taxation systems can play a major role in state-building, by helping create the conditions for relatively negotiated and consensual political settlements between political elites and citizens."

And as for the Resource Curse, the next edition of Tax Justice Focus will contain an article dedicated to this very subject - along with a lot more information about the Finance Curse.