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Why taxes serve prosperity

by Hans Dembowski
An up-to-date tax system contributes to transparency and, ultimately, even democracy

An up-to-date tax system contributes to transparency and, ultimately, even democracy

“No taxation without representation” was the rallying call for the Ameri­can revolution more than 200 years ago. The idea was that those who fund the government must get a say in how it uses that money.

Today, international experience shows that the slogan also makes sense upside-down. There hardly is much meaningful representation without tax­ation. Governments that rely on other sources of revenue are under much less pressure to give account to their people.

For many years, oil wealth was considered a blessing for nations. That perception has changed drastically. Today, scholars speak of an “oil curse”. The reason is that resource-rich countries are often controlled by dictators who personally exploit the natural wealth and can afford to ignore their people’s wishes. To them, their people’s productivity and welfare simply do not matter.

It is often argued that poor people should not have to pay taxes and, since many people in developing countries are poor, taxes are not a viable option there. Unless it applies only to the absolute poor, this argument is wrong. It distorts the idea of the state. The state should not be considered an institution that grants favours as the government pleases. It must be an institution based on a social contract that defines rights and duties. The right price for the right to vote and access to vital public infrastructures is to give the state a fair share of one’s income. Taxes are a civic duty.

After independence, the governments of many former colonies promised too much and asked for too little. Their grand schemes to provide everyone with free water, free electric power, free education and free healthcare failed. Services deteriorated fast, and pretty soon people were paying bribes to get access at all. These policies did not lead to public prosperity; they created black markets which generated additional incomes for underpaid civil servants. The governments concerned did not have the money to hand out everything for free – and they never gave their civil services the incentives that result in solid performance. The most important incentive is a decent salary, which only a decently funded government can afford.

It is not healthy for a government to depend on aid moreover. True sovereignty hinges on the ability to manage a nation’s affairs with that nation’s means. It does not inherently serve democracy when governments become accountable to foreign donors instead of their own citizens.

It is always an uphill struggle to pass and enforce tax laws since there is always fierce opposition to this kind of measures. To overcome such resistance, democratic governments have to argue well and spend their money wisely. In this setting, the productivity and welfare of the people matter, so governments become more likely than oil-empowered autocrats to invest in good healthcare and solid education in support of their citizens.

Because of this virtuous circle, development experts today, two generations after decolonisation, speak of a “governance dividend”. The term reflects the empirical evidence that countries are run better where governments rely on taxes. And it emphasises that it makes sense for the international community as a whole to fight tax ­havens and stem cross-border tax evasion. In our era of globalisation, issues that matter at the national level, ­always matter at the international level too.