Did they learn to tax? Taxation trends outside the OECD

ABSTRACT

We map trends of tax policy change in developing countries and transition economies since the 1980s, compare them to tax trends in the advanced Western democracies and review some of the explanations offered by the contributions to this volume. We find that non-Western countries follow the lead of Western countries in some important respects but not in others. While non-Western countries brought their general revenues closer to Western levels and copied important features of Western consumption taxation including higher value added tax revenues and lower revenues from trade taxation, they failed to emulate the hallmark of 20th-century Western taxation: a strong and progressive personal income tax. The taxation trends are closely associated with socio-economic changes (as summarized by GDP per capita) and structural factors (as summarized by country size). Yet the impact of political institutions on taxation is non-linear and complex.

KEYWORDS:

• revenue mobilization
• developing countries
• public finance
• taxation
• democracy

ACKNOWLEDGEMENTS

We thank the editors Daniel Mügge and Wes Widmaier, the two other special issue organizers Hanna Lierse and Carina Schmitt as well as the participants of the two corresponding workshops in Bremen for their helpful insights.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

SUPPLEMENTAL DATA

Supplemental data for this article can be accessed http://dx.doi.org/10.1080/09692290.2016.1174723.

Notes

1. Table A1 in the appendix provides descriptive information on our country sample.

2. The income groups are constructed by ranking countries according to their GNI per capita at one particular date (2011) and then grouping them according to the World Bank income classification (see https://datahelpdesk.worldbank.org/knowledgebase/articles/378833-how-are-the-income-group-thresholds-determined). The only difference is that we collapse the World Bank's separate categories of lower middle-income and upper middle-income group into one unified middle-income group.

3. The two regime groups are constructed by ranking countries according to their Polity2 Score in 2011. Following the convention in the literature, we sort countries with a Polity Score of 6 or higher into the democratic country group, and countries with a score of less than 6 into the non-democratic group.

4. The size groups are constructed by comparing countries’ population size in 2011 to the global median population size of that year (World Bank 2013). The 2011 median country size was roughly 6 million. Countries with larger population are coded as big, countries with smaller populations as small (irrespective of whether they are OECD-23 or RoW countries). Population is a standard measure of country size because it reflects the size of the national labor endowment. Yet it may arguably overrate the size of population-rich but capital-poor developing countries. Genschel, Lierse and Seelkopf use national GDP as an alternative measure of country size but find that it yields broadly similar results as the population measure (Genschel et al. 2016).

5. As Cottarelli reports in his analysis of revenue mobilization in developing countries, dynamic and static income groups lead to broadly similar conclusions (Cottarelli 2011: 12, fn. 18).

6. A third potential answer is that regime differences have a non-linear effect on taxation that is not captured by the dichotomous distinction between democratic and non-democratic countries. For instance, Maria Melody Garcia and Christian von Haldenwang find a U-shaped relationship between Polity Score and total tax revenue in their sample of 131 countries, 1990–2008. Allegedly, full democracies and full autocracies both have higher tax revenues than hybrid regimes (Garcia and von Haldenwang 2015). Since no paper in this volume investigates this possibility, we do not discuss it here.

7. In a nutshell, the economic baseline model holds that small countries have more to gain from tax-induced capital inflows than large countries, and therefore choose lower capital tax rates in the competitive equilibrium (see Wilson 1999 for a thorough review).

Additional information

Notes on contributors

Philipp Genschel

Philipp Genschel is a professor for European public policy at the Department of Social and Political Science and at the Schumann Centre for Advanced Studies at the European University Institute, Florence, Italy.

Laura Seelkopf

Laura Seelkopf works at the Research Center on Inequality and Social Policy, University of Bremen, Germany. She is mainly interested in the political economy of taxation and has published several articles on this topic in journals such as, The Journal of Public Policy, New Political Economy and Politics & Society.