Why do Developing Countries Tax so little? (Besley) Flashcards
What is the typical tax revenue as a percentage of GDP for low-income countries compared to high-income countries?
Low-income countries collect 10-20% of GDP in taxes, while high-income countries collect around 40%.
This disparity has been consistent throughout the 20th century.
What economic structures complicate tax collection in developing countries?
Challenges include:
* Large informal sectors
* Small-scale firms
* Dependence on foreign aid and natural resources
These factors reduce the incentives to develop robust tax systems.
How do weak political institutions affect tax revenue in developing countries?
Weak political institutions can lead to:
* Misallocation of funds
* Limited accountability
* Low contestability of power
These issues can prioritize elite interests over public goods.
What role does corruption play in tax compliance in developing countries?
Corruption erodes public trust, discourages compliance, and makes it difficult to increase tax revenue.
Citizens are less likely to support higher taxes if they perceive the system as unfair.
What is essential for effective tax collection in developing countries?
A culture of tax compliance linked to national identity and social norms is crucial.
Events that foster shared purpose can strengthen tax compliance norms.
What is the dynamic process required for building fiscal capacity?
It requires long-term investments in:
* Institutions
* Administrative systems
* Effective compliance mechanisms
This process is intertwined with broader state-building efforts.
What is the relationship between tax systems and state-building?
Robust tax systems are closely tied to improvements in:
* Property rights protection
* Provision of public goods
Effective tax collection can enhance overall state capacity.
What factors contribute to low tax revenue in developing countries?
Factors include:
* Economic structure
* Political institutions
* Socio-cultural factors
Addressing these requires a multifaceted approach.
What is the impact of a large informal sector on tax collection?
It hinders tax collection, particularly income tax, making it difficult to track income and enforce compliance.
Governments may need to encourage greater formality to broaden the tax base.
How does dependence on foreign aid affect domestic tax incentives?
It can reduce the incentive for governments to raise taxes from domestic sources.
Reliance on easily taxable natural resources can disincentivize comprehensive tax systems.
What historical pattern is observed regarding tax revenue and economic development?
There is a positive correlation between a country’s income level (GDP per capita) and its tax revenue as a share of GDP.
Now-developed countries had similar tax shares as today’s developing countries a century ago.
What does the paper suggest about the importance of state capacity?
Building robust tax systems is a reflection of broader state capacity essential for economic development.
Effective states are crucial for creating conducive environments for growth.
What is the relationship between tax compliance norms and national identity?
Weak national identity can undermine willingness to contribute to public goods through taxation.
Strengthening national identity may enhance tax compliance.
What is a key assumption of the benchmark model of taxation discussed in the paper?
A key assumption is that higher income leads to higher tax revenue, which may not hold true in developing countries.
This model can be problematic due to unique challenges faced by these nations.
Fill in the blank: The development of a culture of tax compliance is often linked to _______ and social norms.
[national identity]
True or False: Political instability and corruption in developing countries often coincide with economic stagnation.
True
Weak state capacity can lead to poor economic performance.
What is the fiscal history of a people considered essential for?
It is considered essential for understanding its general history, influenced by economic demands and tax revenue usage.
What correlation exists between a country’s income level and its tax revenue as a share of GDP?
There is a clear positive correlation.
How do high-income countries primarily collect taxes compared to low-income countries?
High-income countries depend more on income taxes, while low-income countries rely more on trade taxes.
What does Figure 6 indicate about top statutory income tax rates across income groups?
Top statutory income tax rates are roughly the same, but the share of income taxes in GDP varies significantly.
What is suggested as a more effective method for increasing tax revenues in low-income countries?
Broadening the tax base rather than simply increasing tax rates.
What does the benchmark model assume about tax collection?
It assumes a ruling group raises taxes until the marginal benefit of expenditure equals the marginal cost of taxation.
What challenges does a large informal sector present for tax collection?
It makes broad-based income taxation very difficult due to hard-to-measure incomes and transactions.
How can government actions encourage greater formality in the economy?
By building a functioning legal system, creating credit and land registries, and investing in cadastral surveys.
What impact does dependence on foreign aid and natural resource revenues have on tax systems?
It can reduce the incentive to build a robust domestic tax base.
How do weak political institutions affect taxation?
They can lead to policy decisions favoring elites and diminish progressive taxation demand.
What is the relationship between national identity and tax compliance?
A weak sense of national identity can undermine willingness to contribute through taxes.
What are some factors influencing tax morale?
Social and cultural factors, such as perceived fairness and national identity.
Fill in the blank: The _______ refers to the ability of a government to effectively raise revenue and implement fiscal policy.
[Fiscal Capacity]
What is the definition of ‘Tax Base’?
The total amount of income, property, goods, or services subject to taxation.
What is ‘Tax Withholding’?
A system where taxes are deducted from payments and remitted to the government.
What does ‘Ethnic Fractionalization’ measure?
The degree of ethnic diversity within a country’s population.
What is the ‘Corruption Perception Index’?
An index ranking countries based on perceived levels of public sector corruption.
What historical development is linked to the evolution of taxation in now-developed countries?
It is linked to state-building and financing wars.
How does political governance affect tax collection in developing countries?
Weak governance and corruption hinder tax collection efforts.
What is a key feature of fiscal development in transitioning from developing to developed countries?
The transition from trade taxes to income and consumption taxes.
What implications does low taxation have for the development prospects of developing countries?
It limits the state’s ability to fund essential public goods and services.
