Taxes and fragile states – How political can it get?

The 2014 OECD report on Domestic Resource Mobilization in Fragile States is an interesting – and paradoxical – example of the current debate on statebuilding. Linking domestic resource mobilisation and fragile states is a very welcome approach, and the political thinking driving it is just what is needed in development debates. But by relying on assumptions about fragile states that are optimistic at the best of times, means this report falls short of expectation.

Taxation was once considered a mainly technical issue – but effective taxation relies on a process of bargaining between state and citizens, which is by its nature a deeply political process. The report solidifies a move away from purely economic reasoning towards broader political and institutional objectives. This kind of political thinking is welcome.

Paradoxically, while this report acknowledges the deeply political nature of tax reform, it still uses a apolitical, technocratic approach to implementing reforms. It assumes that certain levers can be pulled which will set in motion a process leading to a more responsive and legitimate government. How valid are these assumptions?

Building a State Can Be Taxing

Historically speaking, the centrality of taxation in processes of state formation is clear. The question remains however whether it was taxation that led to state formation, or vice versa? Causality is difficult to establish, then as well as now.

The thinking is based on a number of conceptual linkages.  Firstly, through paying taxes, the population has a stake in supporting the state, and the state has an interest in being responsive. Tax reform is thus assumed to lead to a more vocal population and a more responsive government. Secondly, taxation can therefore be used to extend the reach of the state over its territory; which is considered an essential element of an effective state. Indeed, “levels of taxation can be considered a useful indicator of state performance”[i]. Thirdly, countries with higher taxation economic resources are distributed more equally, leading to greater social cohesion.

In fragile states these conceptual linkages may not hold up because of the  specific context and particular challenges. Citizens may not gain enough voice to hold their governments to account when they become taxpayers – a somewhat responsive state is actually considered to be a precondition for citizen’s voice to become effective.

Fragile states are often not particularly responsive, nor legitimate for that matter. Questions can be raised about the wisdom of expanding the state presence if its basic legitimacy has not yet been achieved. Perceived or real inequalities in treatment of specific social groups can exacerbate conflict, especially if the state has very little capacity.

Even in western countries, tax collectors are hardly seen as benevolent harbingers of the benefits of the state, so casting a wide net to include as many  groups as possible in the tax base is likely to meet resistance. As the OECD report suggests, showing the relationship between taxes raised and services delivered may indeed help boost tax morale, but again only if these services are actually delivered, something fragile states tend to struggle to do effectively.

The Chicken or the Egg?

An effective tax system requires state legitimacy, transparency and effectiveness. But these are exactly the things that tax reform is supposed to help achieve. The report acknowledges that political will is essential. but what if this political will is not there, or the vested interests too powerful?

Research shows that while formal tax structures and tax administrations have been transformed in many countries, improvements in levels of income tax collection and the redistributive potential of taxation have been very difficult to achieve[ii]. It is precisely the political nature of taxation that makes it so resistant to change, as it encounters strong resistance from vested interests, and mobilising the potential winners is hard. Even those who stand to gain tend to perceive the reforms as threatening because of the limited trust in government[iii].

Rather than assuming that tax reform can do all these nice things for statebuilding in fragile states, it would be better to look at whether the preconditions are there for these theories of change to hold. And if not, what margins of maneuver still exist? What could be a – perhaps small – way to catalyse this virtuous circle of public spending, government legitimacy, willingness to pay taxes, and so forth? Where can coalitions for reform be achieved? Is it possible to design tax reforms that align with elite incentives, or can one think of domestic reforms that would help shift interests of the elite towards a more pro-poor tax and development system?

Tax restructuring has the potential to be a force for good, and this OECD report clearly presents important approaches that can be taken. Yet, with tax reform, as with many other issues on the statebuilding agenda, it is the politics that matter. Development discourse still has to find a way to really integrate politics into its way of thinking, and move beyond the current tendency to bring political theory in without changing the technocratic approaches it is so used to advancing.