Taxation is main arena of politicsALTax
In any system, democratic or nondemocratic, taxation is of course always and everywhere a contested concept.
Some pay and some do not. Some pay more than others. Some receive compensating services; some do not. Such matters are and in democratic states, can be resolved only through political channels.
Indeed, history suggests that the need to secure an adequate degree of consensus from the taxed is one of the principal ways in which, over the centuries, democratic institutions have spread. No nondictatorial government in this age of information and mobility
can stay in power for long without securing a certain degree of consent from the populace, not least in the area of taxation. State legitimacy thus rests to a considerable extent on the quasi-voluntary compliance of citizens with respect to taxation.
To secure such compliance, tax systems must, over time, in some sense represent the basic values of at least a minimum supporting coalition of the population. The central problem in many countries, for instance, is clearly inequality. On the other hand, the key, and related, governance problem in most of the same countries is lack of accountability.
A better tax system is critical to the solution of both problems.
Reforms that link taxes and benefits more tightly, for example, such as decentralization and more reliance on user charges, may help accountability, if not inequality. Reforms that replace highly regressive and inelastic excises by a less regressive and more elastic VAT may reduce inequality especially of course if the increased revenues are invested in growth-facilitating activities such as education and infrastructure.
The most important function of the tax system in most developing countries is to provide (non-inflationary) funding for pro-poor and pro-growth spending programs, particularly in
The best way to achieve this goal in most countries is likely through a broad-based non- distortionary consumption tax such as VAT, as has long been recognized.
What countries actually do is always and inevitably determined in the first instance by political and not economic calculations. Countries vary enormously in the effectiveness and nature of their political systems. Some may be close to failed states€™ in which institutions are so ineffective that it does not matter much what they attempt to do: it will not work. Others may be developmentalist and wish to use their fiscal systems as part of
a relatively dirigiste interventionist policy. Still others may be of a more laissez-faire disposition. Some may be more populist, some more elitist, some more predatory.
The dominant policy ideas in any country (about equity and fairness, efficiency, and growth), as do the dominant economic and social interests (capital, labor, regional, ethnic, rich, poor), and the key institutions, both political (democracy, decentralization, budgetary) and economic (protectionism, macroeconomic policy, market structure), interact in the formulation and implementation of a VAT as they do with respect to tax and budgetary policy in general.
Uniform results are unlikely to emerge from this constantly boiling cauldron with its different mixes of ingredients in each country. The changing interplay of ideas, interests, and institutions affects both the level of taxation and its structure, including the role of the VAT as well its design and administration.
Taxation is one of the clearest arenas in which to witness the working out of these complex forces.
Viewed in this sweeping perspective, few developing or transitional countries have as yet completed even the earlier parts of the long cycle that produced the (more or less) redistributive and (more or less) growth-facilitating fiscal states now found in most developed countries the long preparatory period during which the idea of the desirability and even necessity of a larger state and a more or less progressive fiscal system became established to different degrees in different countries.
Many governments in developing and transitional countries, not just those in Balkans, are in dire straits. Even countries that have reached relatively safe harbors politically, achieving a certain degree of legitimacy and stability, almost always feel often correctly that they are in an economically precarious situation.
The budget is politically and economically constrained. Life is difficult. Nothing can be done. All this may be true to some extent, but it is also both too much a counsel of despair and too easy a way out. Even in the most hopeless situations something usually can be done to improve matters. No doubt there will continue in most countries to be considerable dispute over what should be done to improve tax systems.
Indeed, in most developing and transitional countries it would be better if there were even more such dispute because unless and until an adequate degree of political consensus on what should be done is achieved, no significant tax changes are likely to be made.
Much of the problem is simply that there is no implicit social contract between governments and the general population of the kind that is embedded in taxation and fiscal principles and practices in politically more stable parts of the world.
History tells us that such principles do not become embedded either painlessly or quickly. The specific substantive suggestions could be make should aim to improve matters such as better VAT administration on a broader base are already the stuff of countless existing reports.
Most countries should do all (or most of) the good things that experts such as we recommend. However, the real question is: Why have so many done so little?
If Balkan countries are to improve their tax systems, they should improve political institutions in ways that broaden and deepen social contracts.
For example, create more responsive and less clientelist political parties, more cohesive and less polarised party systems, and improved capacity of civil society to monitor government and participate in tax debates.
In other words, there can be no good taxation without good representation. It’s right. But is it useful to advise countries they should be something other than what they are?
To return to the more low-level tax policy and administrative issues, it can be said even those who may want to do the right thing often need some help in finding out just what is right and how it can best be done.