Taxation, resource mobilisation and state performance

The process of tax collection is one of the most powerful lenses in political economy to assess the distribution of power in a polity. Indeed, there is a long history of thinking in political economy and history that links the process of state-building with the capacity of rulers to collect taxes. Taxation is also one of the few objective indices we have that measures the power, authority and legitimacy of the state to mobilise resources.

This policy brief presents the findings of research on the political economy of taxation undertaken in several countries: Zambia, Rwanda, Mozambique, Uganda, Tanzania, the Democratic Republic of Congo, Afghanistan, the Philippines and Colombia. Among its findings are:

• Tax collection capacity is a useful (but neglected) indicator of state performance and provides important clues as to where polities lie on the spectrum between fragility and resilience.
• Tax patterns illuminate the shape and character of the elite bargain, which is central in understanding state resilience. At the same time, the nature of elite bargains provides a window into the political limits of expanding tax capacity. How the elite bargain is constructed and how it is related to political stability is central to proposing tax reforms that are politically sustainable.
• How aid is delivered affects the ‘fiscal social contract’ and thus state-building. The greater the amount of aid that is delivered through the state and the more aid that is reported ‘on budget’, the greater the contribution to state capacity in general and to sound public financial management in particular.
• Taxation policy needs to be linked to production strategies. A pro-growth approach to tax policy should take precedence over a pro-revenue approach.
  

The paper also provides the following recommendations:

• The state can use taxation of agriculture to solve collective action problems in production (such as the provision of funds for storage, distribution, and marketing for thousands of dispersed smallholder producers) and help forge strong state-society negotiations and mutual obligations. 
• The tax reform process requires political analysis to understand what types of reforms are feasible in a given context, and increasing taxes and/ or enforcing tax collection may become difficult if it substantially reduces the income flows of elite and allied upper-income groups.