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April 27, 2015

Responding To: Week 13: Responding to Tony Blair

Taxation Contracts Necessary for Fostering Good Governance

Ravi Subramanian

The former prime minister of Great Britain and Northern Ireland Tony Blair spoke at Georgetown on the importance of high quality governance in fostering development in Africa. There is a growing debate on the impact of the sources of government income – or the absence of it – on the quality of governance in Africa and other developing countries. Taxation revenue being one of the main sources of government income around the world is a central theme in such debates.

Taxation impacts the quality of governance via two channels – first being the degree of dependence of governments on taxation revenues for their financial resources and the second being the mechanism of taxation – how governments tax and the social contract between tax payers and the government.

Governments with large non-tax incomes from exports of natural resources such as oil and minerals or from incoming foreign aid need not make efforts for tax collections. Non-tax income makes the government financially independent of tax payers, re-directs the political incentives that the government has and influences the ways in which the government obtains, uses and retains power. Governments become less responsible and less accountable to citizens. Governance is arbitrary, institutional influence is weak and there is no incentive to build institutional capacities of the State. The quality of governance is headed towards mediocrity.

Additionally, how governments tax matters. Even if governments are fully dependent on taxation revenues, it does not follow that they will be accountable. They can levy taxes coercively.  This will damage relations with citizens and reinforce poor governance. This leads to citizens working actively towards tax avoidance and sending money--which would otherwise stay within the country and be used for economic activities--offshore.

A healthy dependence of governments on tax revenue encourages bargaining with taxpayers and an exchange of voluntary compliance by citizens over tax payments for influence over public policy via institutional actors. The bargaining process between the government and citizens in terms of the taxation amount, means and accountability builds up healthy tensions between them and creates a balance of power between the government and institutional actors of society. This is necessary for paving the road towards good governance.

Ravi Subramanian currently runs Siemens’s Low Voltage Converters Business Segment in India. He was selected as a Global Shaper in the Mumbai Hub of the World Economic Forum in 2011. 

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