Citizen-State Relations: Improving Governance Through Tax Reform
Author: Wilson Prichard
Size: 69 pages (736kB)
How can tax reform enhance citizen-state relations? This report examines the role of taxation in building more responsive and accountable government, and in expanding state capacity. It finds that the specific character of tax systems and of tax reform is very important to strengthening connections between taxation and broader governance gains. Governments and donors can strengthen tax-governance links through three types of actions: 1) specific measures to enhance and re-orient the dominant tax reform agenda; 2) support for civil society actors to engage in debates about tax issues; and 3) managing the provision of aid in ways that maximise positive revenue-raising incentives and local accountability.
One of the ways in which taxation can improve governance is by developing the state apparatus. Improvements in tax administration can lead to broader improvements in state capacity by means of: administrative innovations that can spread through the civil service; pressure for improvements in other agencies; an enhanced government presence in remote areas; and by providing data and information essential to other government activities. In order to improve the state's administrative systems, a supportive tax reform agenda should focus on:
Taxation can also improve governance by developing responsiveness and accountability. Governments that rely on taxes engage in a 'tax bargain' with citizens. This process engages taxpayer-citizens in politics: citizens comply with taxes in exchange for government providing effective services, the rule of law and accountability. However, in many countries taxpayers have little faith in the system, which remains essentially coercive and offers benefits and exemptions for elites.
Research indicates that a consensual tax bargain is more likely where taxpayer awareness and education are high; the tax system is transparent and highlights tax-expenditure linkages; taxpayers have shared interests and a high level of mutual trust; there is adequate trust in the integrity of the tax system; taxpayers are organised politically; and voluntary compliance is emphasised. Reform should therefore aim to improve responsiveness and accountability by: 1) improving equity in tax enforcement and administration; 2) improving public awareness, transparency and taxpayer services; 3) broadening and improving direct taxation; and 4) strengthening civil society engagement with tax issues.
It is also important to consider the impact of aid on taxation – on levels of tax collection, on how taxes are collected, and on government dependence on tax revenue as a share of total revenue:
Two, more speculative, insights emerge from recent research on taxation and state building. In order to support increased accountability in recipient countries donors could:
Prichard, W., 2010, 'Citizen-state Relations: Improving Governance Through Tax Reform', OECD/DAC Governance Network, OECD Publishing, Paris
Organisation: Organisation for Economic Co-operation and Development (OECD), http://www.oecd.org