Monday, April 12, 2010

Paying taxes improves government.

This is one of those things that should be obvious. However, since the obvious isn't always so sometimes a paper is necessary to show that. Of course, the paper does delve a bit deeper into some ideas that do require a bit of a closer look, such as that the type of taxes make a difference. Also proving something empirically is a significant contribution on its own. Another interesting finding is that where there is a high degree of "ethnic fractionalization" improved taxation does not result in the same governance gains. Their model suggests that taxation leads to greater public scrutiny and accountability of government which leads to better government. This is explained more fully in the paper's literature review which mentions several other papers I may have to take the time to track down.

A few key lines from the paper, both quoted from the abstract:
We find that higher tax revenues (in relation to GDP) are consistently associated with improvements in the quality of governance. This result is robust to different estimation methodologies, to variations in the country sample, and to controlling for the influence of variables that other studies have identified as affecting the quality of governance. Our results support the notion that policies aimed at mobilizing tax revenues may be justified based on the greater accountability of government that may result.

Overall, worth reading if you have an interest in the links between taxation and governance (a limited audience I know). Though my recent reading of "The Thirty Years War" makes me wonder about a couple of related topics. Possible research questions if I get a burning desire to delve into this particular field at some point in the future, or get someone to pay me to do it. First, does who the tax burden falls on matter, or more precisely does it matter if the tax burden falls more on the wealthy than the less well off? I specifically have in mind a discussion in the book about how as taxes raise the ability of the Empire to collect them broke down (the fighting had a lot to do with this) forcing the taxes to become simpler, such as a greater reliance on poll taxes, that fell more heavily on the poor rather than the rich. So, if the data is available, a follow up study on whether there is a correlation with the ability to tax the wealthy would be interesting (in this particular case I believe it would be more correlation than cause however).

Second, does what the government is spending taxes on influence the link between taxes and governance? It seems reasonable to wonder if high military spending requiring higher taxation may not have the same effect as if the taxes were high to fund social security spending. Or it may have no effect on the link between taxes and governance, if I knew I wouldn't be posing the question.

I also would like to mention I prefer charts embedded in the text to ones at the end.

[Hat Tip Economix]

1 comment:

  1. Interesting. It makes sense, and if I were in a position to, I'd gladly pay you to study whether more progressive taxes improve governance more or less than flatter ones.