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Our view

What good governance depends on

by Hans Dembowski

Opinion

Since the late 1970s, the idea has spread internationally that the lower taxes are, the better for the economy. It is misleading.

In truth, a strong economy needs a competent government that provides public goods such as infrastructure, rule of law and health care. For these and related purposes, governments must be funded properly. Experience shows, moreover, that democracy works best where most citizens pay taxes and expect state agencies to deliver essential services reliably. A broad tax base and no loopholes may then make it possible to keep tax rates low, but not the tax revenues.

Scandinavian countries have strong democracies and resilient market economies as well as substantial tax revenues. In the USA, where the “small government” has many adherents, the most dynamic states are not Montana or Wyoming, which have few regulations and taxes, but California and New York, which have strong infrastructure, excellent educational facilities and public budgets that are fed by local and state taxes. If keeping the government out of as many sectors as possible were the key to prosperity, the structural adjustment programmes of the 1980s and 1990s would have succeeded spectacularly. They did not. The lesson was that development needs a capable state. The goal must be to raise appropriate taxes, not to keep taxes low.

For several reasons, developing countries’ tax legislation and national revenue services tend to be weak. It need not be this way.

Some argue that poor people cannot afford to pay taxes, but the truth is that rich nations were collecting taxes when they still had much lower incomes than today.

Some believe that developing countries should get official development assistance as a compensation for colonial exploitation, but that is not an approach that suits national independence and sovereignty.

Some point out that it is very hard to tax informal businesses because these businesses do not do formal accounting and must not be overburdened. This is correct, but the consequence is that legislators have to develop clever rules that fit their nation’s needs.

Some argue that the international system is biased, so developing countries cannot raise the taxes they need. They have a point, but it does not mean that countries should not improve their performance, which, by the way, would help them negotiate better international treaties.

Governments often shy away from increasing taxes or introducing new ones. They know that enforcement can cause resentment among those who must pay. In the lack of tax revenues, however, the same governments are unable to provide services that people expect, and that also leads to resentment. Prudent policymakers strike the right balance. Unfortunately, some political leaders create or tolerate loopholes that let privileged people get away with not contributing their fair share to the public good. Some leaders, moreover, appreciate complex tax legislation because it allows them to hound opponents, critics and independent media with tax investigations. They normally do not worry much about fair and effective enforcement of the law.

To achieve the Sustainable Development Goals (SDGs), all nations need good governance. Good governance, in turn, depends on viable public fi­nances. All governments must rise to their responsibility, and taxpayers, ready to pay their fair share, should feel encouarged to holding them accountable.

Donald Trump’s tax reform in the USA, by the way,  is entirely misguided. It is set to increase the deficit, will reduce governmental capacities and may even trigger a destructive global race to the bottom.

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