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Taxation and State-Building in Developing Countries
There is a widespread concern that, in some parts of the world, governments are unable to exercise effective authority. When governments fail, more sinister forces thrive: warlords, arms smugglers, narcotics enterprises, kidnap gangs, terrorist networks, armed militias. Why do governments fail? This book explores an old idea that has returned to prominence: that authority, effectiveness, accountability and responsiveness is closely related to the ways in which governments are financed. It matters that governments tax their citizens rather than live from oil revenues and foreign aid, and it matters how they tax them. Taxation stimulates demands for representation, and an effective revenue authority is the central pillar of state capacity. Using case studies from Africa, Asia, Eastern Europe and Latin America, this book presents and evaluates these arguments, updates theories derived from European history in the light of conditions in contemporary poorer countries, and draws conclusions for policy-makers. ¨ UTIGAM DEBORAH BRA
is Associate Professor at American University,
Washington DC. O D D - H E L G E F J E L D S T A D is Research Director at the Chr. Michelsen Institute, Norway and Director of the U4 Anti-Corruption Resource Centre. M I C K M O O R E is Professorial Fellow in the Institute of Development Studies and Director of the Centre for the Future State at the University of Sussex.
Taxation and State-Building in Developing Countries Capacity and Consent Edited by
Deborah A. Bra¨utigam, Odd-Helge Fjeldstad and Mick Moore
CAMBRIDGE UNIVERSITY PRESS
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521888158 © Cambridge University Press 2008 This publication is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published in print format 2008
ISBN-13 978-0-511-37760-0
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ISBN-13 978-0-521-88815-8
hardback
ISBN-13 978-0-521-71619-2
paperback
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Contents
page vii viii ix
List of figures and tables List of contributors Acknowledgements 1
2
3
4 5 6
7
Introduction: taxation and state-building in developing countries ¨ UTIGAM DEBORAH A. BRA Between coercion and contract: competing narratives on taxation and governance MICK MOORE
34
Capacity, consent and tax collection in post-communist states GERALD M. EASTER
64
Taxation and coercion in rural China THOMAS P. BERNSTEIN AND XIAOBO
89
¨ LU
Mass taxation and state–society relations in East Africa ODD-HELGE FJELDSTAD AND OLE THERKILDSEN
114
Contingent capacity: export taxation and state-building in Mauritius ¨ UTIGAM DEBORAH A. BRA
135
Tax bargaining and nitrate exports: Chile 1880–1930 CARMENZA GALLO
8
1
160
Associational taxation: a pathway into the informal sector? ANURADHA JOSHI AND JOSEPH AYEE
183
v
vi
9
10
Contents
Rethinking institutional capacity and tax regimes: the case of the Sino-Foreign Salt Inspectorate in Republican China JULIA C. STRAUSS
212
Tax reform and state-building in a globalised world ODD-HELGE FJELDSTAD AND MICK MOORE
235
References Index
261 287
Figures and tables
Figures 7.1 Chile 1880–1930. Nitrate and iodine: indices of tonnes of exports and nitrate prices per tonne ( pounds sterling) page 166 7.2 Chile 1880–1930. Share of taxes on exports and imports from ordinary revenues 169 Tables 4.1 Taxes, fees and apportionments imposed on Chinese peasants 4.2 Tax burdens as a proportion of per capita peasant incomes in China, 1996 4.3 Regional variations in tax burdens on the rural population in China, 1996 4.4 Major peasant protests in China, 1997 6.1 Mauritius: sugar export tax as a percentage of total revenues (Rupees ’000) 6.2 Growth in nineteenth-century public debt in British colonies (£ millions) 6.3 Bonds issued by ten most active ‘developing’ countries and colonies, London bond market, 1871–1881 7.1 Chile: summary of characteristics of historical periods 7.2 Chile: volume of exports: coefficients of variation 8.1 Environmental influences on associational taxation 8.2 Summary of the three cases: Ghana, Senegal and Peru 8.3 Fiscal crisis: Ghana, Senegal and Peru 9.1 Net tax receipts of the Salt Inspectorate, 1913–1927 9.2 Salt Inspectorate collections under the National Government, 1928–1937 9.3 Comparative personnel classification and salary scales
97 99 100 104 142 150 152 168 177 194 202 204 222 223 228
vii
Contributors
JOSEPH AYEE
University of Ghana, Ghana
THOMAS P. BERNSTEIN
Columbia University, USA
¨ UTIGAM DEBORAH A. BRA GERALD M. EASTER
Boston College, USA
ODD-HELGE FJELDSTAD CARMENZA GALLO ANURADHA JOSHI
¨ XIAOBU LU
American University, USA
Chr Michelsen Institute, Norway
City University of New York, USA
Institute of Development Studies (IDS), University of Sussex, UK
Columbia University, USA
MICK MOORE
Institute of Development Studies (IDS), University of Sussex, UK
JULIA C. STRAUSS
School of Oriental and African Studies (SOAS), University of London, UK
OLE THERKILDSEN
Danish Institute of International Studies (DIIS), Denmark
viii
Acknowledgements
When we began this enterprise in 2002, the suggestion that issues of tax and revenue might be central to governance and state formation surprised many people. We have the satisfaction of knowing that this view is now becoming mainstream, and that there is an appetite for the material presented here. Many people and organisations helped us bring it to the table in edible form. Marta Arretche, Marcus Melo, Lise Rakner, Aaron Schneider, Richard Snyder and Robert Taliercio contributed intellectually at the authors’ workshop held in Copenhagen in June 2004. Margaret Levi provided most helpful comments on some of the papers at a session we organised at the Annual Meeting of the American Political Science Association in September 2006. From within development policy organisations, Ben Dickinson, Max Everest-Phillips and Sue Unsworth have continuously encouraged us to invest in a serious collective work of scholarship. Two anonymous referees provided very helpful comments to Cambridge University Press. Linda Bateman managed the process of getting authors to publisher with great efficiency and commitment. The UK Department for International Development has been the principal source of material support, mainly through financing, since 2000, the Centre for the Future State at the Institute of Development Studies, University of Sussex. Danida, Norad and the Norwegian Research Council also funded some of the underlying research. With the help of Ole Therkildsen, the Danish Institute for International Development (DIIS) hosted and funded our authors’ workshop. The Chr. Michelsen Institute, Bergen, helped finance the production. The editing involved a great deal of work, but little drudgery. Special thanks are due to Alf Morten Jerve for arranging for the three of us to spend two wonderful weeks kneading it into shape in his house at Kvingo, on the west coast of Norway, in the summer of 2005. ¨ UTIGAM DEBORAH A. BRA ODD-HELGE FJELDSTAD MICK MOORE
June 2007 ix
1
Introduction: taxation and state-building in developing countries Deborah A. Bra¨utigam
1.1
Introduction
Taxation is the new frontier for those concerned with state-building in developing countries. ‘The history of state revenue production’, as Margaret Levi declared, ‘is the history of the evolution of the state’ (1988: 1). Taxes underwrite the capacity of states to carry out their goals; they form one of the central arenas for the conduct of state–society relations, and they shape the balance between accumulation and redistribution that gives states their social character. Without the ability to raise revenues effectively, states are limited in the extent to which they can provide security, meet basic needs or foster economic development. Yet the political importance of taxation extends beyond the raising of revenue. We argue in this book that taxation may play the central role in building and sustaining the power of states, and shaping their ties to society. The state-building role of taxation can be seen in two principal areas: the rise of a social contract based on bargaining around tax, and the institutionbuilding stimulus provided by the revenue imperative. Progress in the first area may foster representative democracy. Progress in the second area strengthens state capacity. Both have the potential to bolster the legitimacy of the state and enhance accountability between the state and its citizens.
Earlier versions of this chapter were presented at the University of California, San Diego Department of Political Science, 16 February 2006 and Princeton University Comparative Politics Seminar, 27 April 2006. Comments from participants at these seminars, in particular Nancy Bermeo, Clark Gibson, Barak Hoffman, Jeremy Horowitz, David Lake, Jonas Pontusson, Lynn White, Jennifer Widener, Deborah Yashar and Peter York, are much appreciated. I am also grateful to David Hirschmann, Mick Moore, Gerald Easter, Odd-Helge Fjeldstad, James Mahon and Ole Therkildsen, who read and commented on earlier drafts of the chapter, and to the contributions by Lise Rakner, Aaron Schneider, Steven Friedman, Dele Olowu, James Wunsch, Jose´ Cheibub, Michael Ross, Christopher Heady, John Toye, Tony Addison, David Bevan, Lesli Dikeni and Dumisani Hlophe in meetings and workshops organised around this book project. Meghan Olivier provided excellent research assistance. I would like to thank David Hirschmann for many hours of discussion on taxation, and for his continued support during the time and absences required by this project.
1
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Deborah A. Bra¨utigam
This claim – that taxation is a central component of state-building – unites the contributions to this volume. We do not argue that taxation is a unilaterally positive force; much depends on the way in which states and societies negotiate (or fail to negotiate) revenue raising. Chapters 4 and 5 in particular emphasise the perils of coercive taxation. Yet we do contend that it is an exceptionally important force, and that it may affect governance in direct but perhaps unexpected ways. This idea is largely missing from the new scholarship on state-building (Chesterman, Ignatieff and Thakur 2005; Fukuyama 2004; Levy and Kpundeh 2004; Rueschemeyer 2005). It is also largely missing from the practical concerns of those working in the aid community, who tend to focus far more attention on cutting expenditures than on raising revenues (Therkildsen 2002a). The ‘Washington Consensus’ has converged around the economic outlines of a ‘good’ tax regime (broad-based, with low marginal rates) and there is growing diffusion of an administrative model for revenue raising in the independent or autonomous revenue authority; Mick Moore and OddHelge Fjeldstad discuss this further in Chapter 10. However, the lack of attention to the relationship between revenue raising and governance is surprising, especially given the long-standing linkage between taxation and governance assumed by students of European and American history. We define state-building as the process of increasing the administrative, fiscal and institutional capacity of governments to interact constructively with their societies and to pursue public goals more effectively. In Europe, as Schumpeter noted, taxes not only helped create the state, they ‘helped to form it’ (see Swedberg 1991: 108). The origins of representative government are intimately bound with the evolution of taxation. The oft-told narrative begins with war: the costs of warfare led European monarchs to increase direct taxation, which they were able to do only through bargaining with their societies’ elites. This had two political outcomes: it prompted the rise of parliaments, and it led to larger, more capable and more professional state bureaucracies. The argument about taxation and representation is a familiar one, and studies of political development in low-income countries are beginning to focus more closely on these relationships. Less familiar is the argument about taxation and state capacity. It proceeds thus: revenue demands fostered reform of tax systems, shifting from tax farming to permanent, modern bureaucracies. These set the standard for the evolution of bureaucratic structures in Europe’s new states. The needs of these bureaucracies for a literate and numerate workforce helped stimulate the rise of systems of formal education. The bargain between taxpayers and monarchs encouraged a rule of law protecting private property rights. Backed by taxation, rulers were able to raise bonds on private capital markets. Formed originally to
Introduction
3
finance wars, these institutions became essential supports for European economic development. If this reading of the European experience is correct, there may be a governance dividend in more explicit attention to the political dimension of taxation in today’s developing world. This book addresses three main questions across two broad themes of taxation and representation, and taxation and institutions: 1. How do taxation and sources of public revenue affect state–society relations and governance in contemporary developing countries? A major axis of debate is whether the taxation relationship either (a) is intrinsically coercive and therefore inimical to consensual governance, or (b) provides an opportunity for the creation of consensual and representative government through ‘revenue bargaining’ between states and organised citizens. 2. When (if at all) does the revenue imperative begin to create a virtuous circle of institutional development? As shown in this volume, the revenue imperative can produce a variety of institutional outcomes. In some countries (and in some historical periods) revenue and related institutions are developmentally ‘better’ than in others. What is the origin of more effective and credible state institutions, and tax systems that are able to elicit higher levels of consent? 3. What are the key political considerations involved in enabling governments of contemporary developing countries to tax more effectively, more equitably and more sustainably? Few developing countries have yet succeeded in creating tax systems with high levels of both capacity and consent. Their tax systems are often regressive and distortionary, and lack legitimacy. Tax administration is usually weak and characterised by extensive evasion, corruption and coercion. In many cases overall tax levels are low, and large sectors of the informal economy escape the tax net entirely. How can tax reform strengthen states and at the same time contribute to accountability and better governance? Although the concern with taxation and state-building in developing countries is still quite new, we build on a foundation of historical and contemporary research that takes taxation as central to the state–society relationship in what are today’s advanced capitalist countries. Some of this research uses large, cross-national datasets, while some have studied these issues using comparative case studies, often historical. Statebuilding is a social process that unfolds over long periods of time. As researchers as diverse as Barrington Moore (1966), Sven Steinmo (1993) and Atul Kohli (2004) have shown, it lends itself well to methods emphasising the effect of history, and to those that illuminate the role of power holders and state–society alignments. Detailed case studies emphasise context and the enduring influence of history in interpreting the factors
4
Deborah A. Bra¨utigam
that affect the design and effectiveness of tax systems, the willingness of societies to pay taxes, the role played by taxation in state–society bargaining and the stimulus taxation may provide to develop the capacity of the state in other areas. This is the approach we have taken in this book. This introduction has four parts. I begin with a discussion of recent scholarship on the political economy of taxation, asking what this might contribute to our concern with state-building. The review situates our book in the context of a burgeoning literature, but a literature that for the most part focuses on the advanced capitalist countries, and that addresses two narrower questions: what explains the level of taxation, and what explains the design of tax systems? These questions are not irrelevant for our concern with state-building, and the review highlights promising pathways laid out by this scholarship. It has much to say for one of our central concerns: what factors affect states’ ability to tax? Yet much of this literature tackles the issues that concern us only indirectly. For our purposes, it has strengths, but also weaknesses; I discuss these briefly in the second part of this chapter. The third and fourth sections draw on the contributions of our authors, as well as on a selection of recent studies, to highlight how taxation relates to the political economy of state-building in contemporary developing countries. Here my focus is on two of the central themes introduced above: (1) taxation as a factor in the building of institutions and state capacity; (2) taxation as a factor in state–society relations, particularly in the expansion of representation, bargaining and accountability. The third theme, implications for tax policy in contemporary developing countries, is the central concern of Chapter 10. 1.2
Political economy theories of taxation
Historically, taxes as a percentage of income have tended to rise over time, but not always in the same way, and not everywhere. States without much capacity tend not to collect much in the way of taxes, and they also tend to be poor and non-democratic. How do we untangle these various strands? Scholars in economics, political science, history and sociology have constructed at least five approaches to the political economy of taxation, all of which attempt to explain different levels of tax and, by implication, state capacity and state–society relations.1 First, economists have emphasised economic structure, the level of economic development and ‘tax effort’. The second approach emphasises taxpayers’ ideologies, values and culture in explaining compliance with the state’s taxation
1
See Therkildsen (2001) for a detailed review of some of the seminal literature in this area.
Introduction
5
demands. The third approach highlights the role of war and other threats in explaining the incentives for rulers to modernise their revenue bureaucracies, while the fourth set of theories seeks to explain differences in state capacity and tax systems through the analysis (often historical) of political institutions. The fifth and final set of theories, fiscal contract models, frames taxation as a collective action problem: rulers wish to maximise revenue, taxpayers wish to minimise payments. These two preferences lead rulers to offer something (representation, accountability, services) in an exchange based on reciprocity. Although I discuss these separately, it is important to note that individual scholars often employ two or more of these approaches simultaneously. 1.2.1
Level of economic development and economic structure
The structure of taxation, the general shape of tax systems and the overall level of taxation tend to change over time and with economic development.2 Though countries differ, there is a stylised pattern to these changes: from tax farming to professional bureaucracies; from particular excise taxes on products such as salt and rum to general value-added taxes; from ‘head’ or ‘poll’ taxes to income and employment taxes, and so forth (Hinrichs 1966). These varied patterns of taxation have long been an important concern for public finance economists (Bird 1992; Musgrave and Peacock 1964; Newberry and Stern 1987). A standard economic approach to framing the relationship between taxation and state-building is to explain the level of taxation (and, by implication, the capacity of the government) through a combination of the level of economic development and other aspects of economic structure. Countries with higher incomes have higher tax ratios as a percentage of national income. This higher ratio accompanies other factors that also rise with development: literacy, industrialisation, economic openness, debt, formalisation of the economy and urbanisation. New ‘tax handles’ (foreign trade, oil wells, a formal manufacturing sector) as well as new technologies ease the process of collecting revenues. In these views, the relationship between taxation and state capacity is a simple, evolutionary process, a function of modernisation captured by this quotation: ‘Ability to tax is closely associated with administrative capability and this is likely to improve with economic development’ (Burgess and Stern 1993: 774–5). Public finance economists long ago included a political dimension in their comments that ‘political will’ was also a factor in revenue collection
2
Mick Moore reviews this literature in Chapter 2.
6
Deborah A. Bra¨utigam
(Kaldor 1963). This recognition also finds expression in the literature on ‘tax effort’, or the degree to which countries actually make use of the potential for revenue generation afforded by a given economic structure (Hinrichs 1966; Musgrave 1969). However, even these examinations usually stopped with a determination that tax effort was high (or low), and that governments were ‘unwilling’ to use their available tax capacity. An International Monetary Fund (IMF) study of tax effort in forty-three countries in sub-Saharan Africa, for example, found a significant countryspecific effect, suggesting to the researchers that ‘the political system’ and ‘attitudes toward government’ might affect tax effort (Stotsky and WoldeMariam 1997: 10, 29). This recognition that tax ‘effort’ and the effectiveness of a revenue-raising system vary because of political factors that affect the relative power of states and taxpayers is helpful for our state-building concern, but it is helpful more as a starting point than as a fully-fledged theory or as a path forward. As one recent group of economists remarked, ‘If this is the story, then economists, who do not readily take to the revolutionary barricades, have a problem in suggesting a viable solution’ (Bird, Martinez-Vazquez and Torgler 2004: 3). On the other hand, the emphasis on attitudes led to a second set of theories that economists and others have used to model tax compliance as a function of taxpayers’ social values, sense of moral obligations, ideologies and norms. 1.2.2
Societal factors: culture, values, trust and ‘tax morale’
Governments’ abilities to collect taxes depend on people’s willingness to pay them. People’s perception of the risk of detection and punishment, and the impact of different penalties, occupied the first round of research on tax compliance (Allingham and Sandmo 1972). Later researchers added other social factors to their models: the sense of moral obligation; the perception of the tax system’s fairness and, in particular, the perception that other taxpayers are also paying; and the foundation for trust: the extent to which taxpayers believe governments (a) spend their tax money wisely, and/or (b) spend it on public goods that will benefit the taxpayer (Andreoni, Erard and Feinstein 1998; Frey and Feld 2002). As this suggests, the focus on societal attitudes has two strands. The first emphasises ideology, values or culture as something that affects attitudes independently from the current state–society relationship (Levi 1988; Putnam 1993; Webber and Wildavsky 1986). As Levi has noted, a society’s ‘public-spiritedness or normative conviction’ can be motivating factors in the willingness to pay taxes. People with a strong belief in a welfare state might thus be more willing to pay high rates of taxes (Levi
Introduction
7
1988: 52). Religious traditions of ‘zakat’ or ‘tithing’ might form a sense of moral obligation to hand over a percentage of one’s income to the community (Hull 2000). The attitudes in this case are intrinsic and not conditioned by actions by the government, although they might well be conditioned by state–society relations in the past (Cummings et al. 2004). The second strand of research emphasises attitudes formed through experience with government. It suggests that compliance will be affected by perceptions of the government’s legitimacy and the fairness of the tax system, as well as taxpayers’ expectations that their tax moneys will be spent on valued public services (Slemrod 1992). Economic structure figures here: some research suggests that countries with sizeable shadow economies or informal sectors have lower tax morale, as people in the formal sector can more easily observe large numbers of others escaping the tax net (Alm and Torgler 2004). The government’s capacity to provide services also matters. In this sense, tax compliance is based on an exchange, or a ‘fiscal contract’; we return to this theme in Section 1.2.5. 1.2.3
War and taxes: bureaucratic modernisation as a response to threat
In searching for the starting point for state capacity and bureaucratic modernisation, one set of theories emphasises war, threat and taxation (Henneman 1971; Prestwich 1972). These theories have their deepest roots in the same European story that provided the basis for ideas of a fiscal contract. Intense military competition created a rising demand for revenue. European citizens accepted that war required extraordinary tax levies. Hobbes outlined this understanding in The Leviathan (1615) when enumerating the right of the sovereign to make war and peace, ‘judging when it is for the public good, and how great forces are to be assembled, armed, and paid for that end, and to levy money upon the subjects to defray the expenses thereof’ (emphasis added). However, as Charles Tilly (1985: 180) pointed out, up until the rule of Henry VIII, ‘the English expected their kings to live on revenues from their own property and to levy taxes only for war’. This changed, as war stimulated the parallel development of a permanent and professional revenue infrastructure. Because of the growing importance of a steady and reliable source of revenue, rulers began to professionalise tax collection. From systems based on the farming out of excise, customs and land taxes, or raising revenue through the sale of offices or ‘prebends’ to private individuals, they turned to an increasingly professional civil service. This process happened first in Britain. Tax revenue constituted one of the central ‘sinews of power’ supporting the early rise of the British state (Brewer 1989). By the time of the Napoleonic Wars, British taxes were
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Deborah A. Bra¨utigam
triple those levied by the French, rising to 24 per cent of national income from an already high base of 15 per cent (Tilly 1985). Legislatures in Britain used their power of the purse to hold governments accountable for the use of citizens’ tax revenues. But accountability brought with it new demands for capacity. Parliaments demanded reports and information to document the legislative proposals, and government departments became more skilled and sophisticated in collecting the information they needed to respond to legislative demands for accountability. John Brewer (1989) has given us the seminal account of this process.3 In the late seventeenth century, the British state ended tax farming and established permanent bureaucracies to collect excise and customs taxes. These were staffed by full-time, salaried employees who were recruited by examinations or apprenticeships, promoted on merit through steps in a hierarchy and retired with a pension. With its standard operating procedures and staff training, the British Excise Office in particular rapidly became the model for the administrative revolution taking place across Europe. It was the largest and the most competent part of the government, closer ‘to Max Weber’s idea of bureaucracy than any other government agency in eighteenth-century Europe’ (ibid. 68). Moreover, the growth of the revenue bureaucracy and its technical approach to assessment and collection created a demand for clerks: literate and numerate employees.4 Employees of the excise were required to know algebra and calculus. Although compulsory primary education would wait in Britain until late in the nineteenth century, municipalities, private groups and individuals were sponsoring schools to meet this demand long before the passing of the national education acts. The needs of the revenue department also stimulated other areas of capacity-building. Statistics on imports and exports began to be collected in 1696 and the government began to calculate its balance of trade. The government also started to undertake studies of economic activities with revenue potential. As Brewer noted, a ‘good’ government began to be seen as one with ‘technical knowledge and expertise’ (ibid. 224). The existence of a professional tax bureaucracy allowed Britain and other countries to develop a sophisticated system of bond finance. Knowing that their governments had access to reliable sources of revenue, investors and financiers could accept lower rates of interest for these bonds, allowing the government to invest not only in weapons and manpower for wars, but, many 3 4
This section draws on Brewer (1989) unless otherwise noted. Brewer (1989: 105) notes: ‘They learnt how to use decimals, square roots and cube roots as well as the geometry of cones, spheres, rhomboids and cylinders. They were also instructed in bookkeeping and accounting, the use of the slide rule and the art of gauging.’
Introduction
9
decades later, in the construction of systems of sanitation and water that would boost living standards for the increasingly urban populations. The issuance of bonds and the rise of a system of national debt helped establish the City of London as a global financial centre. As Tilly (1985: 180) memorably put it: ‘war, state apparatus, taxation, and borrowing advanced in tight cadence’. By the time of the industrial revolution, Britain had the ‘vital preconditions’ of education, strong property rights, stable credit and deep financial markets (Ferguson 2001: 16). In this view, the stimulus for state capacity and the institutions of a modern economy lies in the revenue imperative, but as the professionalisation of taxation proceeds, it pushes additional changes that build states, as a response to legislative demands for accountability, as a way to nurture sectors of the economy with tax potential and as a way to make revenue raising more efficient and effective. 1.2.4
Political institutions and tax systems
A fourth set of theories focuses on the question of tax systems and tax policy. They begin with the observation that the structure, goals and effectiveness of revenue-raising systems differ even in countries with similar economic structures, with established democratic governance and with modern, capitalist economies, and they argue that this is due to the structure of political institutions. Steinmo’s Taxation and Democracy (1993), a study of the politics of tax policy in Sweden, the United States and Britain, set the pattern for much of this work. Steinmo gave credit to periods of war in all three countries for raising the overall tax take. However, he argued that their tax systems differed in systematic ways that could be explained by differences in the design of democratic institutions (constitutions, electoral rules, parliamentary committees, etc.). These institutions affected the relative bargaining power of those most interested in tax outcomes, the information available to them and their incentives for seeking particular kinds of tax policies. With the expansion of datasets that code a variety of political institutions in an increasing number of countries, scholars have explored the impact of a range of institutions on the ability of states to raise revenue.5 These studies primarily address state-building from the perspective of tax bargaining (factors that affect relative bargaining power), the incentives for cooperation and compromise, the impact of other political factors as they intervene to shape decisions over taxing and spending, and (perhaps most basically) the relationship between taxation and
5
The Database on Political Institutions (DPI) is one prominent example of a new database.
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representation. They focus both on elections, and on post-election politics, in models emphasising the ‘median voter’, partisan competition, veto players and agenda setters (Gould and Baker 2002). In a test of the idea that democracies exchange taxation for representation, scholars have asked how regime type affects taxation (and vice versa). Cheibub (1998) found that whether a government was democratic or a dictatorship had no independent effect on the government’s ability to tax, once he controlled for other factors such as the level of economic development. Boix (2001) challenged this, concluding that levels of taxation grew more rapidly in democracies than in authoritarian regimes, as elections allowed changing societal interests to better express their preferences, and redistribution became an important societal goal. Although a decade ago John Waterbury (1997: 394) could lament that the ‘venerable’ taxation-leads-to-representation hypothesis was nearly impossible to confirm, in 2004 Michael Ross tested this hypothesis. Ross reasoned that the relationship could work in two possible ways: (1) rulers raise taxes, causing citizens to protest and seek representation (democracy) in order to lower their tax burden; alternatively, (2) citizens use a cost–benefit approach when reacting to a tax increase. If the increased burden comes without a commensurate increase in desired services (or even a drop, as in many cases of economic crisis and fiscal reform), there is pressure for representation. His study found support for the latter hypothesis: ‘When citizens are faced with an undemocratic government that is charging unreasonably high prices for its services, they tend to demand democratic reforms’ (Ross 2004: 248). The impact is relatively rapid; however, merely increasing taxation had little effect on demands for democracy. As Moore notes in Chapter 2 in this volume, work by James Mahon (2005) confirms and extends these findings, which lend support to the fiscal contract idea. Other scholars have focused on how institutional differences within democratic systems might affect extractive capacity, again, largely through the incentives they provide for cooperation or compromise. Boix (2001: 15) found that controlling for the level of economic development, constitutional arrangements had ‘a marginal effect’ on tax revenues. Parliamentary systems were able to raise more revenues than presidential systems, but whether the state was federal or unitary, or what type of electoral system it had, was far less significant than factors related to the structure of societal interests, and, in particular, the interests of the median voter. On the other hand, Gerring, Thacker and Moreno (2005) found that countries with what they term ‘centripetal’ constitutions, those with incentives for ‘voice’ rather than ‘veto’ (political systems that were unitary rather than federal,
Introduction
11
parliamentary rather than presidential, and list-proportional rather than first-past-the post), could collect higher levels of taxes. From the point of view of states still struggling to build effective institutions and constructive state–society relations, these studies offer some insight into the possible implications of different institutional choices, the way state institutions affect tax compliance, and the way state–society relations both affect and are affected by taxation. Yet for our purposes, much of this research raises as many questions as it answers. In much of the developing world, democracies either do not exist, or are new, fragile or impermanent. Institutions may have the same names, but they may not function in the same way. Several studies bear this out. For example, whereas Cheibub (1998) found no relationship between regime type and extractive capacity, researchers who examined this relationship among a subset limited to developing countries found opposite results: Fauvelle-Aymar (1999) determined that autocracies had higher levels of taxation than democracies, while Thies (2004) came to the reverse conclusion.6 In another example, Boix (2001) found that high voter turnout was a factor in explaining the level of taxation in democracies, but that this effect only operated for countries at middle-income levels and above. Steinmo and Tolbert (1998) found that the level of taxation in OECD countries was significantly affected by partisan arrangements: countries with one large, majoritarian party, and countries with many small parties, would each (for different reasons) have fewer incentives to compromise than those in which the largest party held just under a majority of the seats.7 However, when Gould (2001) included developing countries in the dataset, the effect of party size vanished. All of these suggest that we cannot assume that ‘institutions are institutions’ and that they will have the same effect in poor countries as in wealthy ones. On the other hand, Steinmo and others who have explored the origins of institutions emphasise the importance of historical legacies, critical junctures and path dependence. Several of our authors (Easter, Fjeldstad and Therkildsen, Strauss, and Bra¨utigam) use variations on this approach in their chapters for this volume.
6 7
Each used different time periods, however: Cheibub: 1970–90, and Fauvelle-Aymar: 1980–9. One can certainly imagine situations where this would not be the case, but the logic is that large parties win elections, so they have no need to compromise and can restrain expenditures, and thus tax revenues. A system with several smaller parties is fairly equally balanced and would also restrain expenditures. Only those where the largest party holds just under half of the seats (44 to 49.9 per cent) were associated with higher tax revenues.
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1.2.5
Taxation and the fiscal contract
The idea that taxes involve a kind of bargained exchange between governments and taxpayers has very deep roots (Moore 2004a). Mick Moore’s chapter in this volume describes the historical origins of this exchange. In early modern Europe, monarchs seeking new sources of revenue to fight wars increased taxes on trade, on property and on ordinary citizens (through various head – ‘poll’ – or hearth taxes). Yet only the taxes on trade (customs duties), goods (excise duties) and fixed property had the potential to be increased significantly, and these increases were subject to consent, which in turn had to be negotiated. Assemblies of notables were formed to negotiate this consent. A primary aim of representation remained the bargain over taxing and spending. Taxpayers who believe that their interests are represented in a democracy may be more willing to pay taxes, but they also begin to believe that their payment of taxes gives them the right to representation. When the American colonists complained about taxation without representation, they were speaking to a colonial government that had long accepted this principle. Representation, however, is only one element of the fiscal contract. The bargain might also involve services: public goods (such as defence, schools or roads) or semi-public goods (benefits provided to producers or consumers). And it involves pressure on governments to be accountable to taxpayers for the use of their money. There are two somewhat different approaches to the fiscal contract idea. One emphasises the broad societal, economic and state factors that are more or less conducive to revenue bargaining: Moore’s chapter, for example, examines, among other things, war, mobile assets, political stability, the size and complexity of the state apparatus, economic modernisation and economic rents. The other approach is based primarily on an individual level of analysis and a framework emphasising rational choice: Margaret Levi’s seminal study Of Rule and Revenue (1988) has shaped all subsequent work in this vein. Levi began with the assumption that rulers – as individuals – seek to maximise revenues. She hypothesised that their ability to do this is limited by (a) their relative bargaining power (who controls the economic, political and coercive resources that both the state and citizens require to meet their goals?), (b) transaction costs (costs of negotiating, measuring revenue sources, monitoring and enforcing compliance) and (c) rulers’ discount rates (the degree of concern for current versus future revenues). These factors in turn are shaped by macro-level variables such as economic structure, changes in the means of production (such as technology), the international context and the form of government. Taxation, she argued, is a collective action problem,
Introduction
13
a reciprocal contract of sorts that results in quasi-voluntary compliance by taxpayers: ‘quasi-voluntary’ because of the ever-present mix of norms, incentives and sanctions. Taxpayers pay taxes in part because they expect that the ruler will provide services (security and other public goods) in return for revenues. However, tax payment might be modelled as a prisoner’s dilemma: compliance is affected by assurances of fairness; the knowledge that others are also paying their taxes, but also by the threat of coercion. Bates and Lien (1985: 61) added an emphasis on the mobility/ non-mobility of taxable assets, arguing that it was those with moveable property (traders and capitalists) who were compensated by being allowed an increasingly strong voice in government policy decisions. Levi’s framework speaks directly to our concerns about state-building. Her goal was to refine the broad hypothesis that ‘taxation built states’ by specifying the mechanisms that lie between the need for revenue generation and the creation and evolution of state institutions. For Levi, representative government arose in part because it was useful to rulers: it reduced transaction costs, enabled the system to appear more ‘fair’ (building trust) and strengthened the link between the payment of taxes and the receiving of services. All of these enabled rulers to raise more revenue. Likewise, the organisational forms of the state change over time as economic development creates changes in the resources available to rulers and to taxed groups. Technological changes, ranging from the adoption of a money economy to the use of computers to track the flow of money, affect transaction costs such as the measurement of income and wealth. These changes make it possible for rulers to consider previously inconceivable policies such as the abandonment of tax farming, or the direct taxation of income. Over time, governments construct more sophisticated institutions that foster lower cost compliance. These institutions – starting with the tax agency, but including also the increasingly large array of services that are the government’s side of the fiscal contract – form the heart of governments’ bureaucratic evolution. They strengthen the state. With its emphasis on collective action problems and individual decisions, rational choice theory emphasises the relationship between states and societies in its approach to state-building. A paper by Timmons (2005) lends some support to the fiscal contract idea. Using a dataset with ninety countries, Timmons found that, controlling for income levels, countries with a higher proportion of revenues from income and corporate taxes had stronger protections for property rights, a concern of citizens at higher income levels. Those relying more on regressive taxes (those that hit the poor relatively harder) had higher proportions of social spending. Timmons argued that these results represent a ‘credible commitment’ by governments to services that taxpayers
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valued. This should not surprise us: if taxation is indeed part of an exchange, it is rational for governments to provide more benefits to the group of taxpayers who provide more revenue. When Margaret Levi’s 1988 book Of Rule and Revenue was reviewed in the American Political Science Review, the reviewer commented that ‘taxation is probably the most significant political phenomenon that political scientists have left relatively unexplored’ (Curtis 1989: 1424). The review above suggests that this exploration is now well under way. I introduced five sets of theories that have been used by social scientists to explore taxation and that offer some potential for an investigation of taxation and state-building. They emphasise, respectively, the autonomous working of economic development; values and culture; war and threat; the structure of political institutions; and the shaping of a fiscal contract and exchange as the key factors affecting extractive capacity (some have examined how taxation affects some of these factors, as well). These approaches have strengths, and they are not mutually exclusive; our authors sometimes use several of them in making their analyses. Yet we use them with caution. Like modernisation theory, these theories were developed from the specific experience of the advanced capitalist world. The discussion of political institutions in the preceding paragraph suggests something unsurprising: developing countries, in general, differ from advanced capitalist countries. We can see these differences in four major areas. First, by definition, they are at lower levels of development. Their institutions are weaker, their economic structures are based more on agriculture than industry, their informal sectors and shadow economies are larger and they have fewer tax handles. Chapters 2, 4 and 5 in this volume emphasise that this combination of factors favours more coercive approaches to taxation, while Chapter 8 highlights other difficulties presented by large informal sectors. Second, as Moore points out in Chapter 2, many developing countries are highly dependent on one or a few natural resources; this was never the case in the Organisation for Economic Cooperation and Development (OECD) countries, even in their early histories (see Burgess and Stern 1993: 782–3). Gallo’s case study of Chilean nitrates (Chapter 7) and Bra¨utigam’s chapter on sugar exports in Mauritius (Chapter 6) are cases in point. Third, inequality is considerably higher in many developing countries than in the OECD, and this has been the case for quite some time (Kaldor 1963: 411). Finally, compared with the richer countries, developing countries face a different set of global pressures and influences. They are often recipients of aid, something that substitutes for taxes but that may have different political results. They have higher levels of debt, and weaker positions in the global political economy. As Chapters 9 and
Introduction
15
10 both make clear: political pressures to raise or lower protective tariffs, export taxes and Value Added Tax (VAT) have often come from outside the country, such as from financial institutions with an interest in the fiscal health of a country (Gloppen and Rakner 2002; Mahon 2004). Whether democratic or not, these external relationships may exert far more direct political influence on a country’s level of taxation than political institutions, rulers’ discount rates or voter turnout. Levi signalled this (1988: 36–7) by adding ‘international context’ to her framework of macro-structural factors; however, she did not consider factors such as foreign aid as influences on the bargaining power of rulers or on rulers’ incentives to bargain with taxpayers. All of these factors complicate the relationship between taxation and state-building and should cause us to pause before making the assumption that when it comes to the political economy of taxation, developing countries are simply poorer versions of today’s advanced capitalist states. We turn now to focus directly on taxation as it affects two of the key questions that matter so profoundly for social scientists: what leads some states to be so much more capable than others? What affects the ability of countries to build more accountable and responsive governance, and the constructive engagement on which economic growth and development depend? We argue that taxation is (or should be) a central part of the answers to both of these questions. 1.3
Taxation and state capacity
In 1963, as one country after another emerged from colonial rule, economist Nicholas Kaldor wrote an article for the journal Foreign Affairs with the title ‘Will Underdeveloped Countries Learn to Tax?’ Kaldor threw a spotlight on the link between state capacity and taxation: ‘No underdeveloped country has the manpower resources or the money to create a high-grade civil service overnight. But it is not sufficiently recognised that the revenue service is the ‘‘point of entry’’; if they concentrated on this, they would secure the means for the rest’ (1963: 417). By state capacity we mean, first of all, a state with an effective bureaucracy. Our point of departure here is Weber’s notion of the modern, rational–legal bureaucracy. As Strauss summarises in Chapter 9, a Weberian bureaucracy is structured along impersonal, technocratic, hierarchical lines. Its written records provide a strong institutional memory, and its personnel have formal salaries, rely on standard operating procedures and knowledgebased rules, and answer to superiors who (ideally) take decisions according to impersonal, technocratic criteria. In examining state capacity, I begin with an analysis of war, threat and natural-resource-based revenues as they
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figure in rulers’ incentives to establish ‘good’ extractive bureaucracies, and the institutional development that is the foundation of an effective state. This leads to the second concern: the impact of past institutional choices and ‘critical junctures’ on the structure of extractive capacity and related state institutions. Last, I briefly consider how the international context affects taxation and state capacity-building in developing countries today, a subject taken up at greater length in Chapter 10. 1.3.1
Rulers’ incentives to build tax capacity
Theories of state-building in western Europe emphasise the central role of war and threats in the development of taxation and related institutions. Several of our authors (Moore, Gallo, Bra¨utigam, Joshi and Ayee) elaborate in their chapters for this volume, that the specific characteristics of different sources or kinds of revenue have different political implications when it comes to building capacity (and state–society relations). (See also Hoffman and Gibson 2005; Snyder and Bhavnani 2005; Timmons 2005.) Both of these factors turn on the question: what gives rulers incentives to build tax capacity? War and threat As the review above emphasised, a large body of literature points to war and threat as the incentive for the long process of state-building that began in Europe. As Tilly (1985) memorably put it, by stimulating demand for revenue: ‘war made the state’. Researchers have now begun to explore the role of war in their analyses of statebuilding in Africa, Latin America and Asia. Jeffrey Herbst, for example, has argued (2000: 126) that African states lack the kind of external threats that prompted European rulers to bolster tax collection, and that this accounts in part for the weaknesses of institutions in Africa, a theme Mick Moore develops further in Chapter 2. Miguel Centeno (2002) made this question the centrepiece of Blood and Debt: War and the Nation-State in Latin America. Centeno found that wars did not push leaders to raise taxes in the eleven Latin American countries he studied; they resorted to debt to finance war. Cameron Thies (2004, 2005) reasoned that higher taxation might occur without an actual war; it might be the presence of significant rivals and the threat of war that would push states to expand their extractive capacity. His study of eighty-three post-colonial developing countries found a significant, positive effect of external threats and strategic rivalries on tax revenues and, by implication, extractive capacity.8 8
There was also some evidence that taxation was higher in states with significant internal ethnic (but not political) rivals.
Introduction
17
Applying the same model to Centeno’s eleven Latin American countries, Thies found a similar, positive effect of war on the level of tax revenues over the course of the twentieth century. As in the early European experience, he concluded, ‘Blood, debt, and taxes are dependably recurrent aspects of the long and painful process of building the modern state’ (2005: 463). Victoria Hui (2005) also made use of this theory in her analysis of statebuilding in ancient China during the Warring States period (656–221 B C ). She made a strong case that the origins of the Chinese state’s formidable bureaucracy could be traced to war, in particular, to the Qin Dynasty’s unusual strategy of ‘self-strengthening’ (building extractive capacity and a meritocratic administration) as it strove to dominate the other warring states, eventually becoming the first dynasty of what we now call China. Julia Strauss’s chapter in this volume suggests, however, that war acted only indirectly as a stimulus for building extractive capacity in China in the early twentieth century. Strauss shows how the Chinese leadership sought a large foreign loan in order both to consolidate a national debt perilously close to default, and to build the central government’s army in order to counter rebel movements. The consortium that offered the loan demanded a lien on the salt tax in order to guarantee repayment. The strengthening of the Salt Tax bureaucracy (under a foreign director) thus came about not through ‘selfstrengthening’ ordered by Chinese leaders, but as a condition for repayment of the loan. Threats were a factor, yes, but the link is not direct. That threats might foster state-building efforts is a theme in research on the East Asian ‘miracle’ economies (Maxfield and Schneider 1997; Stubbs 1999). As early as the nineteenth century, for example, Thailand, which was never colonised, faced the threat of both French and British expansionism on its borders. In 1890, King Rama V invited fiscal advisers from England to oversee the country’s revenue and expenditure accounts (Akira 1989: 79). These early moves helped to undergird the relatively high level of capacity in Thailand’s economic ministries. Yet, as Moore points out in Chapter 2 in this volume, there are significant exceptions to this ‘threat leads to capacity’ thesis, particularly in sub-Saharan Africa, where internal and external threats have led in many instances to state collapse. Taxation may still be a factor here, but the road that leads from war/threat to taxation to capacity may be blocked by the nature of the taxable resources available in many weak states. For the ‘wars make states’ thesis to function, rulers facing threats need a source of revenue that they can actually tax. This leads to the second point: different kinds of resources have different implications for capacity.9
9
This is also true for state–society relations.
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Resources, sectors and rents One of the most significant differences between developing countries and today’s advanced capitalist states is the fact that many developing countries rely heavily on one or several resources for their tax revenue. This fact has generated a large body of research. Rosser (2006) provides a comprehensive overview of much of this recent work. One group of researchers follows the lead of Shafer (1994) who has argued that a country’s ‘leading sector’ shapes the boundaries of states’ ‘authority to tax’ and its tax bureaucracy and related state institutions. ‘Sectors differ in the level of taxable resources they generate, the ease with which such resources can be tapped, the institutions needed to do so, the availability of other revenue sources, and the state’s ability to tap them’ (Shafer 1994: 8). Shafer’s framework can be challenged – it would not predict, for example, the capable states of Chile, also highly dependent on copper at an earlier stage, or Mauritius, almost totally dependent on its plantation economy at independence, but a diversified manufacturing economy now. But his discussion of Zambia, dependent on copper and unable to diversify, is reflected in many states (Nigeria with oil, for example). And Carmenza Gallo, in Taxes and State Power (1991), has shown that in an earlier period the case of Chile did fit the Shafer model: taxing a regionally concentrated export product, copper, led to an overspecialised and small bureaucracy and did little to facilitate the institutional penetration of the state throughout its territory. Other researchers have moved from this insight to note that even the same resource can be extracted and taxed in different ways, and that this might affect the ability of some states in Africa, for example, to avoid the ‘resource curse’. Snyder and Bhavnani (2005) use the example of diamonds, pointing out that those that are widely dispersed, such as alluvial diamonds in Sierra Leone, are more easily ‘looted’ than those extracted by deep-mining industrial corporations. Rulers of countries that happen to have industrial diamonds (Botswana, South Africa) simply find them easier to tax. Facing threats, they are in a better position to use their resources to build capacity and maintain order. Gallo’s chapter in this volume emphasises another aspect of resources: they are usually characterised by price instability. In her case, the instability of world market prices for nitrates ‘undermined the incentives for state authorities to negotiate and consult with nitrate producers, and weakened collective action among producers’. In a relative sense, they strengthened the state. A second, but related, theme linking resource-based economies and state capacity is the literature on the rentier state, which points to the characteristic weaknesses and the lack of accountability of states that depend heavily on revenues from mineral exports (particularly petroleum). The argument proceeds thus: reliance on natural resources and
Introduction
19
other kinds of rents led to a truncated process of institution-building. With easy access to reliable revenues through taxing foreign corporations, resource-based states never needed to penetrate their outlying societies and organise them to raise revenues. They did not need to bargain with their producers over taxes, establish fiscal accountability towards taxpayers or build autonomous, capable bureaucracies that could make policy and direct resources to support autonomous producers. Rulers whose revenue arrived without much effort found themselves making decisions mainly about largesse, or the distribution of the ‘national cake’ as Nigerians put it. Terry Karl described petro-states as: ‘weak giants that could be rendered ineffective by hundreds of rent-seeking Lilliputians’ (1997: 60). To date, the most compelling example of the ‘resource curse’ and how it can affect state capacity was produced by Kiren Aziz Chaudhry (1997) in her detailed account of these processes in two rentier states, Saudi Arabia and Yemen. Chaudhry documented how the institutions of tax states and national markets emerged together after 1918, through the expected processes of bargaining, conflict and the formation of a ‘national community’. With the rise of a rentier economy in the 1970s (based on petroleum, in the case of Saudi Arabia, and on aid and labour remittances, in the case of Yemen), state-building took a drastic step backward. Yemen ‘jettisoned’ its extractive bureaucracy, and Saudi Arabia ‘dismantled’ its tax agency (Chaudhry 1997: 32). ‘The decline of a tax bureaucracy has unintended consequences that bode ill for the long-term development of all parts of the bureaucracy’ (ibid. 33), Chaudhry argued. Without an extractive bureaucracy, these states lost incentives to centralise their fiscal apparatus, obtain information about their producers and basic data on the economy, set fiscal priorities, establish effective regulation for their private sectors and foster the adoption of modern accounting and managerial practices (ibid. 33–4). 1.3.2
Historical legacies and critical junctures
The comparative historical approach used by Steinmo (1993) also provides leverage for unpacking the relationship between taxation and state capacity in developing countries. A number of researchers have noted that historical legacies shape taxation, state capacity and ultimately state–society relations in distinctive ways. In developing countries, colonial legacies are particularly salient, but there are other points at which critical junctures provide the foundations for new institutions and mark the start of different paths.
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In many countries, as Fjeldstad and Therkildsen point out in Chapter 5, colonial systems of taxation had little to do with consent and everything to do with coercion. Their account of Uganda’s tax system points out that one legacy of the colonial system was the fact that ‘while it is a civil offence to default on income tax, defaulting on poll taxes continues to be a criminal offence’. Colonial powers differed in their own histories of developing extractive capacity, thus in the institutions that they brought with them to their colonies, and the models they offered for colonial revenue raising. Early modern Spain, for example, had access to gold, silver and other plunder from its conquest of much of the New World, but it also relied on domestic revenues from sheep herding. The reliance on state-controlled natural resource extraction and commodity exports also characterises many Latin American countries today. In Spain, as North and Thomas pointed out (1973), both sources of revenue provided little incentive to develop an efficient system of property rights or to stimulate more efficient domestic production. In 1562, interest costs on foreign loans drained more than 25 per cent of the annual budget, and Spanish rulers declared bankruptcy six times between 1557 and 1647 (North and Thomas 1973: 129). A cycle of natural resource plunder, foreign loans and repeated bankruptcy was the result of a failure of the Spanish crown to develop stable institutions of extraction or to stimulate more efficient domestic production. The parallels between this model and modern Latin America (Bolivia, Venezuela and Argentina, for example) are unsettling. Korea under Japanese colonial rule provides another contrasting case. Before coming under Japanese rule, the Korean Choson state collected taxes in kind (through corve´e labour and forced military service), and through the issue of prebends.10 This system was not unlike those prevailing in Europe at the start of the early modern era. In ending this system, the Japanese built a formal tax collection bureaucracy with uniformed revenue collection officers, backed by police power (Kohli 2004). Professional collection raised revenues by 30 per cent in the first three years of the new system. The bureaucracy penetrated the villages, with local police, local tax collectors and local intelligence officers. The tax bureaucracy established by the Japanese served independent Korea well. Even before the 1961 coup that brought Park Chung-Hee to power, the Korean government was already collecting a much higher percentage of direct taxes than other countries at its level of development 10
Where unsalaried officials in a particular district collected a set amount of taxes to deliver to the centre, keeping whatever extra amount they were able to squeeze from the peasantry.
Introduction
21
(Shafer 1994: 121). The colonial state shaped the way independent Korea approached the question of revenue generation, the expectations of officials involved in tax collection and the compliance of a citizenry with long experience of being taxed directly. Although numerous studies have identified a positive ‘institutional effect’ of British colonial heritage, with regard to democracy, better property rights and more developed financial markets (Bollen and Jackman 1985), there are many examples where the vaunted British institutions were not transferred. Nigeria formally came under British indirect rule in 1900. Four years later, the governor, Sir Frederick Lugard, issued a proclamation establishing a system of tax farming. This required chiefs to collect taxes directly from their population, but also allowed them to keep half of the amount. At first, as Okigbo (1965: 5–6) relates, chiefs handed taxes to the government treasury, which returned a portion to the chief. However, by 1913, the chiefs were allowed instead to split their tax take with the government. This spared the colonial government from having to develop tax bureaucracies that could penetrate deeply into the countryside. It also institutionalised a very different notion of accountability. In the north of Nigeria, the collection of taxes came to resemble ‘plunder’ (Kohli 2004: 307). The chapter by Fjeldstad and Therkildsen in this volume documents a similar institutional legacy left by the British: the poll taxes that paved the way for coercive rural tax collection in East Africa. In all three cases, this institutional heritage contrasted sharply with that left by the Japanese in Korea. The British left behind a more positive institutional heritage in Mauritius, but as Chapter 6 in this volume shows, this institutional capacity came about only in part by a process of institutional transfer. State capacity at independence was stronger in Mauritius because the sugar producers claimed successfully for well over half a century before independence that their payment of taxes legitimised their demands for employment in the colonial government. Decades before independence, most senior posts in the government had already been filled by nationals, smoothing the transition from colonial rule. In this sense, capacity was built from a state–society bargain over tax. Colonialism also affected capacity when it introduced new institutions layered upon those that had evolved from bargains made by indigenous rulers and their taxpayers. Mette Kjær (2004) drew on Ugandan history to argue that extractive capacity in two districts in Uganda differed primarily because of tax practices that had been in place before British rule. In the more successful district (a former kingdom), the British built upon a pre-existing, relatively centralised and institutionalised system of taxation under the traditional king. In contrast, the other district (whose
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boundaries had been patched together by the British) experienced a history of tax rebellions during the colonial period, and low levels of compliance thereafter. Kjær concluded that these different institutional histories at the sub-national level explain differences in extractive capacity today. Much of the historical work also emphasises that decisions made at critical junctures can continue to define the shape of institutions and the relations between state and society. Evan Lieberman’s research (2001, 2003) on income tax capacity and ‘national political community’ in Brazil and South Africa started with the critical juncture of new constitutions (1891 in Brazil; 1909 in South Africa) that defined how the national political community was to be constituted. Lieberman traced how these century-old decisions still shape the capacity of each state to tax its higher-income earners, affecting both ‘quasi-voluntary’ compliance and the administrative effectiveness and efficiency of the tax bureaucracy. In a similar manner, Gerald Easter’s chapter in this volume considers how tax systems were restructured in the wake of the critical juncture of eastern Europe and the former Soviet Union’s post-communist transitions. He argues that these critical junctures helped place regimes on different developmental paths. Compared to the states of the former Soviet Union, the East Central European states exhibit more democratic decisionmaking, more progress in developing efficient tax administration capacity and greater societal consent to taxation. Decisions made as market economies were first being constructed created alternative paths for these countries’ revenue bureaucracies, affecting their capacity. 1.3.3
International factors
Tax reform in the countries examined by Easter provided an entre´e for another set of influences that have shaped tax institutions in ways unlike those experienced in the advanced capitalist world: international experts, conditionality and foreign aid.11 Julia Strauss’s chapter for this volume provides a look at these processes in an era prior to the formation of the IMF and the World Bank. The Sino-Foreign Salt Tax Inspectorate was, as its unusual name suggests, a jointly operated bureaucracy established as the central condition for a large debt-consolidation loan made to the Chinese government in 1913 by a consortium of foreign banks. Strauss notes that the inspectorate had a ‘preponderance of foreigners in positions of real administrative decision-making rather than simple advising’. 11
There are exceptions to this. For example, Japan called on German experts to shape some of its state institutions during the Meiji Restoration.
Introduction
23
It was headed by a foreigner, and he had the authority to restructure the bureaucracy and the protection that enabled the inspectorate to maintain a high degree of autonomy while transforming itself into a meritocratic, goal-oriented organisation. This role of international influences in shaping tax capacity was noted as well by James Mahon (2004: 25) who found that specific IMF performance conditions were second only to inflation as a stimulus for Latin American governments to undertake capacity-building and other reforms of their tax administrations. ‘The prominence of the IMF has no clear counterpart in the historical model’, he noted. The ideas that shape tax reforms in developing countries today are heavily influenced by current norms held in the international financial institutions, as Fjeldstad and Moore note in Chapter 10. In some cases, these reforms are not creating a more Weberian state, but moving tax collection back to private management, as in the contracting out of customs authorities to private companies. They note as well the fact that, in the poorest countries, revenues lost through trade liberalisation (sometimes done under loan conditionality) have not been restored through other areas of tax reform of which the introduction of VAT has been most prominent in recent years (Baunsgaard and Keen 2005). This brings us to a related set of studies reviewed by Moore in Chapter 2. These argue that countries highly dependent on foreign aid over long periods of time will also face difficulties in developing extractive capacity (Moore 1998). The evidence on this is fairly clear. Bra¨utigam and Knack (2004) found that large levels of aid reduce government revenue generation, even when controlling for the effect of economic decline and political violence; Remmer (2004) had a similar result. Research conducted at the World Bank found that aid to African countries reduced tax revenues by an average of 10 per cent; this average of course masked large variation among the countries in the study (Devarajan, Rajkumar and Swaroop 1999). These studies emphasise two aspects of aid dependence: (1) aid creates more financial autonomy as governments’ prolonged reliance on ‘unearned’ income requires little bargaining with taxpayers, or construction of taxable capacity in society; (2) the aid system, with multiple uncoordinated donors and their independent project management units, can promote institutional destruction in what are already weak states. Theda Skocpol’s introduction (1985: 17) to Bringing the State Back In argued: ‘A state’s means of raising and deploying financial resources tell us more than could any other single factor about its existing (and immediately potential) capacities to create or strengthen state organizations.’ We have seen in this section that the wide variation in the capacities of today’s developing-country governments may in some measure be traced
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to their sources of revenue and to patterns established by their colonial histories. States dependent on natural resources and other rents face different incentives from those that must tax a class of producers. The institutions that are fostered through these incentives serve as building blocks for different kinds of states. In countries rich in natural resources, state-building focuses on the mechanisms of distribution, the ways in which the ‘national cake’ is shared among the stakeholders. Foreign aid and ‘strategic rents’ may provide some of the same kinds of incentives. In contrast, states that rely for their revenues on taxation of producers face stronger incentives to ‘feed the goat’ that must be milked. Colonial histories provided a further set of influences that shaped the approach to revenue raising in newly independent states. This section has emphasised taxation as the leading edge of state capacity. I have considered how some countries came to have ‘better’ institutions than others, and how taxation figured in these outcomes. The next section turns the focus to taxation as a central nexus of state–society relations, affecting accountability, representation and bargaining. 1.4
Taxation and state–society relations
The national system of taxation, as Jane Guyer once said, ‘is a powerful moral, political, and economic theory of state and society’ (1992: 57). This theory is daily represented in practices vividly described by scholars as penetration, domination, compliance or disengagement. Taxation as the stimulus for rebellion is a theme that knows no geographic boundaries: witness the 1794 Whiskey Tax Rebellion in the United States; the 1898 Hut Tax War in the hinterlands of Sierra Leone; the 1908 Anti-Tax Rebellion among Islamic peasants in West Sumatra. The chapters for this volume by Bernstein and Lu¨ and by Fjeldstad and Therkildsen show how coercive taxation is still stimulating rebellion in low-income countries. However, rebellion (as these authors note) is at the extreme end of possible responses by society to state efforts to tax. Exit, bargaining and ‘voice’ (representation) are more common. Chapter 2 considers in some detail the factors that might lead to revenue bargaining, and those that might foster more coercive relations. The fiscal contracts that Moore outlines form the moral basis of society’s demands for accountability and representation. This section emphasises four related aspects of state–society relations. The first has to do with the nature of society itself: societal characteristics and social organisation and the way these differences shape collective action and the state-building project. The other three are more directly affected by state action: revenues-for-services, fiscal decentralisation and embeddedness.
Introduction
1.4.1
25
Societies and social organisation
State-building is shaped by societies, and taxation is a strategic nexus between the state and society. Macro-social factors such as power, class and race affect this nexus, and this makes these aspects of society central to the way taxation affects state-building and governance. States tax societies, but they do not tax all their citizens equally. Those that exit the tax net tend to be either at the top or the bottom of the income scale. Easter’s chapter for this volume depicts powerful Russian elites as a case of the former, while Joshi and Ayee’s chapter focuses on the informal sector as an example of the latter. Furthermore, powerful groups in society that do not seek to influence the state and its policy machinery can exit the tax relationship, as long as states have international sources of finance. Centeno (1997) argued that Latin American state-building contrasted sharply with the European experience in precisely this way. At independence, there was no Latin American ‘class willing and able to ride [the state] to social and political dominance’. By the mid nineteenth century, Latin American nations could borrow in the global capital markets. This option allowed states to have sources of finance without having to negotiate with their elites, who chose exit rather than attempting to capture the state. The development of capacity in Latin America was thus ‘not an absolute phenomenon but a relational one. It is not merely a question of strength but also of the potential of the relevant societies to resist (or welcome) intrusion’ (Centeno 1997: 1570). That tax structures would reflect the interests of the powerful is not surprising, though this concern does not often surface in the crossnational studies on determinants of tax.12 Michael Best (1976) noted this when considering that Central American nations in the mid 1970s collected substantially less revenue than would be predicted by the structure of their economies. His research documented an increasingly strong relationship between the incidence of taxation and the preferences of the powerful, and the conclusion was unmistakable: despite ample ‘tax handles’, Central American governments were going into debt because they were unable to tax the propertied and the powerful. Mahon pointed out (2004: 25) in a review of tax reform experiences in Latin America that ‘those who enjoy effective representation in fiscal matters are not always the ones who provide the most resources to the state, but rather those who provide resources at critical times and are already well organised’. This is
12
See Timmons (2005) for an exception to this. His argument emphasises that tax structures can also follow the interests of the masses. Lieberman (2002b) provides a comprehensive discussion of taxation data as indicators of state–society relations.
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not always the owners of capital. Carmenza Gallo (1997) pointed out that in the case of Bolivian tin, the mine-workers joined the state to strengthen its efforts to raise taxes on the mine-owners. Lieberman’s research (2001, 2003) has emphasised the different ways in which race and class meet in determining bargaining power and incentives for compliance. Although both South Africa and Brazil are highcapacity, high-tax states, only South Africa collects an unusually high level of income tax. Lieberman emphasised that cross-class alliances among whites in South Africa created a long-standing moral basis for nation-building and taxation, allowing a higher incidence of income tax with the understanding that this would benefit the white community, and greater compliance. Brazil’s non-racial ‘national political community’ created a more adversarial relationship between property owners and the intended recipients of transfer payments from the state, leading to more contention over tax, weaker enforcement and higher rates of evasion. As Lieberman concluded, ‘negotiated definitions of political community shaped the logic of interclass and intraclass relations in turn affecting the ability of the state executive to gain the cooperation of economically powerful groups. In other words, the authority and efficacy of the modern state is strongly influenced by how group identities get constructed and institutionalized within the political arena’ (Lieberman 2001: 548). In Chapter 2, Moore points out that British society was organised in a way that fostered tax bargaining: taxpayers were fairly independent of the Crown, homogeneous, and concentrated in a landlord-trading elite with a high capacity for collective action and the ability to hold rulers to their promises. Gallo (Chapter 7) emphasises the importance of taxed groups being able to secure support from other societal allies in their struggles with the state. This focus on societal strength also reminds us that the bargains that shape tax systems in developing countries today may be different from those available to the advanced capitalist states one hundred years ago, and that this may be because societies are organised differently today. Organised labour may be more powerful, for one example. Gerald Easter’s chapter describes the shaping of tax capacity in Russia and Poland after the fall of communism as a reflection of the reshaping of power resources in the two countries, and the constraints this posed to post-transition state leaders. In Poland, specifically, transition empowered organised trade unions, and these became the main bargaining partners for the state, which based its extractive capacity on a ‘social pact’ with households and public sector workers. Alternatively, Russian leaders forged a far less sustainable system: they bargained with the elites, who had quickly gained control of formerly state-owned
Introduction
27
resources. This leads us back to the role of natural resources and the tax base. Russian leaders’ tax strategies shifted from bargaining to coercion in late 1997, when the falling price of oil and other commodities made elites reluctant to pay the taxes they owed. Gallo’s chapter documents similar consequences of price instability in nitrate exports. The external shocks led to a breakdown in a system of price-setting based on effective collective action, weakened the owners of the nitrate mines and prompted the state to shift to unilateral taxation. Finally, through its degree of progressivity, a system of taxation represents a state’s ‘official theory of inequality’ (Guyer 1992: 57). Using taxation as a public vehicle for differentiating among taxpayers, and allocating burdens according to some societally determined ability to pay, draws attention to social duty and responsibility in a manner quite different from that of a regressive tax, such as VAT. It allows debates over taxation to be not simply between taxpayers and the state, but among taxpayers, over the allocation of their relative shares. There is a stark difference between the kind of regressive poll tax in East Africa discussed by Fjeldstad and Therkildsen (this volume) and the graduated property taxes that were the basis of the material links between state and society in Britain, as well as in Korea and Taiwan. These differences can have a qualitative impact on the relations between a state and its society. We can see an example of this in the case of Mauritius (Bra¨utigam, this volume), where the export tax was made into a progressive tax in the mid 1970s. This progressivity enabled the government to shift the burden for transfer payments and redistributive spending more squarely onto the shoulders of the middle class and the wealthy. A tax system that increases equality can affect the public sense of solidarity, fairness and trust, and therefore tax morale and tax effort (Bird, Martinez-Vazquez and Torgler 2004). It may even help consolidate new democracies, as the cases of Poland (Easter, this volume) and Mauritius both indicate. 1.4.2
Revenues-for-services
Quasi-consensual taxation, as Levi (1988) emphasised, involves reciprocity: citizens understand that they need to pay for services, whether these involve security and protection from invading forces, or other public goods and services. How states spend their tax money can affect their legitimacy and their ‘right’ to demand revenues from taxpayers. This is an important theme in the literature on tax compliance and tax morale surveyed earlier in this chapter. However, as Kjær (2004) has noted, there is considerable controversy over the extent to which the payment of taxes in developing countries can be seen as a quid pro quo for better services.
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Deborah A. Bra¨utigam
Her research in Uganda did not support a fiscal contract conclusion. Hlophe and Friedman also contend (2002: 72) that the improved tax compliance following reforms of the South African Revenue Service (SARS) was more related to managerial reforms coupled with an earlier culture of compliance than to a sense of better social services. On the other hand, Fjeldstad (2004) argued in a study of local government, that payment was related to services: South Africans were more likely to pay local service charges if they felt that the government was providing services equitably, collecting revenue fairly and actually using the revenue to provide services. And a study of tax compliance in Botswana and South Africa reported that taxpayers in Botswana rated government fairness and efficiency considerably higher than did taxpayers in South Africa, and their self-reported tax compliance was also higher (Cummings et al. 2005). The limited research that has been done on this in Latin America provides some support for the idea of a service-based fiscal contract. In a study that contrasted the high degree of tax evasion in Argentina with the low levels in Chile, Marcelo Bergman (2002: 290) found that taxpayers who expressed greater satisfaction with the performance of public services such as security, public education or infrastructure were also significantly more willing to pay taxes.13 In other instances, the understanding is expressed implicitly: the Caracas Chamber of Commerce illustrated its understanding that the payment of taxes by its members would give them the ‘moral authority’ to demand in return that the state carry out its duties: ‘The current fiscal shortfall obliges all [taxpayers] to behave loyally, as real citizens, in order to be able to demand with moral authority that the public administration carry out the duties assigned to it by the laws and by the Constitution itself.’14 1.4.3
Decentralisation, accountability and coercion
Decentralisation is under way in many developing countries today, in part promoted by the donor community with the assumption that bringing service delivery closer ‘to the people’ will reinforce democracy and accountability. This fits with the fiscal contract notion as well. However, the evidence on this is decidedly mixed. As Moore points out in Chapter 2, the poorest countries – countries that are largely agrarian, with a wide 13 14
For obvious reasons, the study could not measure actual payment of taxes, only the expressed willingness. Ca´mara de Comercio de Caracas, ‘La Ca´mara de Comercio de Caracas Ante la Reforma Tributaria’, (photocopy), Caracas, May 1994, cited in J. E. Mahon (n.d.).
Introduction
29
variety of possible user charges and taxes, and without effective regulation by the centre – are fertile environments for coercive taxation when local governments are given the responsibility to raise revenues. This describes both rural China and the cases of Tanzania and Uganda (Chapter 5). Bernstein and Lu¨ (in Chapter 4) document the political consequences of the dismantling of the central planning system in China, which left local governments in rural China seriously short of revenue, but burdened by new responsibilities for rural education and other social services. As they suggest, however, an increase in local taxes and fees to fund these mandates aroused local peasants to demand that the central government force local governments to respect their rights. The growth of new forms of elected representation at the local level and the recent abolition of some forms of local taxes are likely to have been, in part, a consequence of these tax protests. This suggests a link between democratic accountability and taxation, but not in the direction predicted by theory. Fjeldstad and Therkildsen (in Chapter 5) make a similar point in their story of decentralised local taxation in East Africa. As in China, local taxes were not conducive to state–society bargaining, but again, rural protest helped bring about the abolition of the poll tax. They emphasise the role of political liberalisation and democratisation in fostering an environment where rural people can mobilise politically to exercise various forms of ‘voice’ to combat a coercive practice and demand accountability from their governments. Taxation did not lead to representation in this case, but democracy helped bring about significant changes in the tax burden of the rural poor. Decentralisation also highlights the role of local taxation in two more state-building debates: the revenues-for-services exchange discussed above, and the governance impact of dependence on foreign aid. In Uganda, the district with the lowest poll tax compliance was also one with very substantial donor funding (Kjær 2004). Yet as Fjeldstad and Therkildsen conclude in Chapter 5, donor demands that local councils raise matching funds for donor-assisted projects (something that is supposed to promote local ownership and accountability) seemed to intensify the incentives for local governments to use coercion; there was little evidence of reciprocity or ‘revenue bargaining’. On the other hand, a study by Hoffman and Gibson (2005) argued in favour of a revenuefor-services interpretation of local government budgets. Local governments in Tanzania and Zambia tended to budget significantly more funding for public services if they received relatively more funding from local taxes. Those with more funding from donors or from central transfers budgeted less money for services and more for their salaries and administrative expenses. Deteriorating public services can also be a
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Deborah A. Bra¨utigam
spark for tax resistance (Fjeldstad 2001: 295). This would suggest that local politicians do have an incentive to offer services in exchange for revenues. Joshi and Ayee (Chapter 8) provide more evidence for this by noting that Peruvian street traders and informal transport operators were more willing to pay taxes to local governments when the government earmarked a portion of the revenues for a fund to pay for services for informal sector operators. Villagers in at least one Chinese county agreed that some taxes (particularly those earmarked for social support services) were legitimate, but they objected to others, such as those for infrastructure and the training of party members (Chapter 4). Chinese at the local level began to conclude that, as Bernstein and Lu¨ put it: ‘When citizens fulfil their duties as taxpayers, they have a right to make claims on the state for provision of public goods and public services.’ Taxation might indeed be a pathway to a more legitimate and responsive state at the local level, but there is also a danger of increased coercion. Without a responsive state at the central level, the risk of local-level coercion can be high. 1.4.4
Embeddedness
Finally, we draw attention in this volume to the fact that taxes build states, but they can also be used to build society, and in particular, to help cement ‘embeddedness’: strong, supportive relations binding states and business, allowing them to negotiate and bargain over policies and strategies (Evans 1995). Successful embedding of the state and business builds trust, eases monitoring and supports the exchange of information. It also fosters reciprocity (Maxfield and Schneider 1997), and it can enable states and societies to solve the collective action problems that accompany efforts to upgrade a sector: training, monitoring, research and development, etc. Evans did not focus on the impact taxation might have on embeddedness, but some of our authors and other researchers have done just this. Rosemary Thorpe and Francisco Durand described the origins of the very successful coffee federation in Colombia, noting that ‘From the start the federation had the right to collect taxes, which resolved a typical collective-action dilemma by providing resources. Hence, from the very beginning it reaped the rewards of political influence’ (1997: 219). The case of Mauritius (Chapter 6 in this volume) also emphasised the organisational capacity of sugar producers in their successful negotiations with the state, a success that included state support (through a dedicated tax) for the strengthening of their producer association, including the private marketing syndicate that collected the tax on behalf of the government and used some of the tax to pay for research
Introduction
31
and joint training. Chapter 7 shows a similar case: nitrate producers in Chile bargained with the Chilean state to use their nitrate tax revenues to solve their collective action problems, enforcing producer quotas among them, and facilitating their efforts to market their nitrate abroad. Joshi and Ayee’s examples in Chapter 8 of innovative taxation of the informal sector in Ghana, Peru and Senegal suggest as well that efforts to tax this sector may depend on the strength and capacity of its associations, and the degree to which associations can demand benefits in exchange for their taxes. Producers are likely to be more open to funding the state’s capacitybuilding when that capacity is being used to strengthen their sector. As Easter shows in Chapter 3, this can work as well when the state constructs a corporatist social pact with workers: closer (embedded) relations lubricated by consent-driven taxation shaped the social democratic bargain in Poland. Dedicated taxes provide one means of ensuring that taxes are, indeed, being used to solve collective action problems that accompany efforts to build and restructure sectors. This alternative form of embeddedness shaped the nature of the fiscal bargain in Poland: social services in exchange for social security taxes. Having taxes collected by producer associations can serve as a powerful builder of mutual trust, legitimacy and accountability. This also qualifies some of the emphasis on autonomy in revenue collection (Strauss in Chapter 9). 1.5
Conclusion and organisation of the book
State-building as we have defined it involves an increase in the capacity of governments to pursue public goals, and to interact constructively with their societies. Some of our chapters focus on the strategies of taxpayers in their interactions with state power, highlighting the factors that foster the constructive engagement on which economic growth and development depend. Others emphasise how taxation shapes political bargains and accountability, and is in turn shaped by them. Others explain the sources of state capacity and effective institutions through the lens of taxation. All of the chapters emphasise a political dynamic of taxation in states still very much in the process of being built. The themes discussed in this chapter are played out in the rest of the book. This essay and the following essay by Mick Moore provide conceptual and theoretical overviews of the topic and position our book in the context of current research on taxation and state-building. Chapter 2 emphasises the determinants of coercive taxation and of ‘revenue bargaining’, and it serves as well to introduce the next three chapters. Chapter 3, by Gerald Easter, on the contrasting state-building processes
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in East Central Europe and the former Soviet Union, explores the politics of three sequential processes – the making of revenue bargains in the course of establishing new tax regimes; the consequent attempts to collect taxes; and the eventual remaking of revenue bargains in order to carry out tax reform. Chapters 4 and 5 analyse the dynamics of coercive local taxation in poor countries. Thomas Bernstein and Xiaobo Lu¨ document how the end of central planning in China, and the rise in unfunded mandates, revived practices of coercive taxation at the local level. This generated considerable localised political unrest; however, this protest has begun to reshape the relationship between the local governments and the centre. Chapter 5, by Odd-Helge Fjeldstad and Ole Therkildsen, traces the history of local poll taxes in Uganda and Tanzania, a form of revenue raising left over from the colonial era but maintained by the independent governments. They show that in East Africa poll taxes have mobilised rural people politically to combat a tax practice that they have experienced as repressive. Next, chapters by Deborah Bra¨utigam and Carmenza Gallo explore the historical evolution of tax bargaining and related institutional capacity in two export-dependent economies. In Chapter 6, Bra¨utigam shows how the colonial export tax on sugar acted as a stimulus for both an unusually high degree of state capacity and democratic accountability in Mauritius. Carmenza Gallo focuses in Chapter 7 on the history of tax bargaining before the First World War in Chile’s nitrate export sector, an important mineral resource that nevertheless generated no ‘resource curse’. She argues that the factor that most affected the scope for institutionalised tax bargaining was world market conditions for nitrates. The last three chapters emphasise the politics and practicalities of tax reform in developing countries: building more capable bureaucracies, and more accountable relations between the state and taxpayers. In Chapter 8, Anuradha Joshi and Joseph Ayee address the dilemma of taxing the informal sector. How are low-income countries to avoid the coercive practices outlined in the chapters on China, Tanzania and Uganda, but still collect revenue from producers who are small-scale, scattered and heterogeneous? They identify innovative mechanisms used in Ghana, Peru and Senegal to suggest that states and societies may be able to solve these problems through unorthodox subcontracting arrangements with producer associations. Their chapter makes a point echoed in the chapters by Gallo, Easter and Bra¨utigam: strong societal organisations can shape the direction and outcomes of taxation, and help to produce a bargain that benefits both state and society. In Chapter 9, Julia Strauss provides an analysis of the deepening of extractive capacity in Republican China. This attempt to create an autonomous Salt Tax
Introduction
33
administration in a hostile environment has some parallels to current efforts to establish autonomous tax administrations in developing countries. In the final chapter, Mick Moore and Odd-Helge Fjeldstad explore what a state-building perspective implies for tax policy in contemporary developing countries. Tax policy is now globalised. There is a powerful orthodoxy, promoted in particular by the IMF and transnational organisations of taxation professionals, that has helped animate an impressive process of tax reform virtually throughout the world. That orthodoxy is, however, driven by economic and fiscal considerations and by the perceived problems and needs of the richer parts of the world. A reform agenda focused on issues of state-building in the poorer countries would look substantially different.
2
Between coercion and contract: competing narratives on taxation and governance Mick Moore
2.1
Introduction
This chapter is motivated by some important facts, some stimulating theory and an urgent policy concern. The facts are that, relative to the historical experience of the Organisation for Economic Cooperation and Development (OECD) countries, the governments of many contemporary developing countries are more independent of their domestic taxpayers for revenue. On average – and with wide variations – they depend a great deal on alternative sources of income that were not available to governments when the OECD countries were comparably poor: rents from natural resource wealth and strategic rents (in practice, mainly foreign aid). The theory suggests that there is a causal connection from (a) this dependence on rents, rather than taxes, to (b) the fact that public authority in much of the South is often relatively illegitimate, ineffective and unaccountable (‘bad government’). More simply, the proposition is that the dependence of governments on broad taxation for revenue is good for the quality of governance. If the theory were right, then we should like to change the ways in which many Southern governments are financed. The volumes of development aid, the modalities of the aid relationship and the control of rents from natural resource wealth all become important concerns from a ‘good government’ perspective. I am not rash enough to offer to resolve all these theoretical and policy issues here. My aim is to help us think more clearly about this notion that, in contemporary developing countries, taxation is good for the quality of governance. The notion that the revenue relationship between state and citizen could be politically constructive challenges fundamentally what many For useful comments on an earlier draft, I am grateful to Deborah Bra¨utigam, Odd-Helge Fjeldstad, Diana Conyers, Max Everest-Phillips, Peter Houtzager, Margaret Levi, James Mahon, Sue Unsworth and Tracy Williams. In addition to these people, Ben Dickinson, Lise Rakner, Michael Ross, Carlos Santiso, Aaron Schneider, John Toye, Mike Weeding and Adrian Wood have provided inspiration and support over many years.
34
Between coercion and contract
35
people think they know about politics and taxes. Taxes are involuntary levies on citizens. All taxation involves the actual or threatened exercise of state power: individual taxpayers are obliged to hand over money, with no firm guarantee of reciprocity, in situations where they are perceived to have little or no choice. By creating incentives and occasions for state agents to extract money from unwilling payers, does the tax relationship not continually nurture authoritarian or bureaucratic rule? The underlying cartoon image is of a large bully state intimidating cowering citizens into emptying their pockets. Sometimes, citizens strike back: there is a close affinity between the notion of taxation as coercion and an awareness of the historical frequency of tax revolts.1 An alternative scenario is, however, equally plausible. Think first of a rather sluggish tax collector lumbering after a number of nimble citizens. Much of the time he cannot catch them. When he does, he treats them brutally and manages to squeeze out some cash. At the end of the day, he trudges back wearily to show an angry king how little money he has to show for his efforts. Meanwhile, the citizens gather in the tavern, commiserating with those of their number who are bruised and taxed, and lamenting, as always, how tomorrow their business and pleasure will be interrupted by the constant need to keep an eye out for the tax man. Then, someone has an idea: could they not reach an agreement with the king about how much they would pay, and what the king would do for them in return, that would leave everyone better off? Conversation might turn to how they would select representatives to negotiate with the king. There might even be in the room a proto social scientist who would declare this the positive sum option, contrasting it with the existing negative sum situation, in which more for the state is less for the citizen, and everyone suffers indirectly from such a clumsy way of financing government. Like the negative sum account, the positive sum narrative begins with a greedy state threatening to tax citizens who would prefer to keep their wallets closed. However, it then takes another route. The experience of being taxed engages citizens in the political process. Taxation becomes a source of healthy conflict between them and the state. Ultimately, the dependence of governments on tax revenue encourages bargaining with taxpayers and an exchange of (quasi-) voluntary compliance over tax payments for institutionalised influence over public policy.
1
Contemporary anti-tax militants, especially in the United States, sometimes employ a version of history that celebrates tax rebels as heroes. See, for example, Adams’s book, Those Dirty, Rotten Taxes (1998), which presents a willingness to rise up against ‘tax tyranny’ as foundational to the American character. See also Boaz (1997) for a similar set of arguments.
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Mick Moore
These two core narratives form the poles around which ideologues and intellectuals have long debated the underlying relationship between taxation and governance. To some degree, this debate is predictable. Each position reflects one side of a duality that is deeply ingrained in Western social thought: the difference between (a) those who instinctively interpret the exercise of power in terms of self-interested domination (‘power over others’) and view institutions as instruments for that exercise (the negative sum-ers); and (b) those who understand power more as a constructive capacity to get things done in some common interest (‘power to’) and comprehend institutions as mechanisms to promote cooperation (the positive sum-ers).2 The human brain has a limited capacity to process the complexities of social reality. Each of us is likely to have instinctual or ideological preferences for one or another interpretation. Each is valid in some contexts. We have in this book two chapters (by Thomas Bernstein and Xiaobo Lu¨, and Odd-Helge Fjeldstad and Ole Therkildsen) which describe systems of coercive taxation, in China and East Africa respectively. By contrast, Gerald Easter’s chapter on post-communist East and Central Europe focuses on constructive revenue bargaining, as, to a lesser extent, does Deborah Bra¨utigam’s chapter on Mauritius. It would be misguided to try to assert the fundamental truth of either polar view. It does all depend. But on what does it depend? I aim here to move us closer to answers to that question by dealing separately with two big questions. The first is: when is taxation most likely to be coercive? I suggest, in Section 2.3, the various combinations of circumstances most likely to bring about this unhappy outcome. The second question is: when does the taxpaying process contribute to political development by helping to catalyse ‘revenue bargaining’– i.e. the exchange of tax revenues (for the state) for institutionalised influence over public policy (for citizens)? This is the more complex question. It is helpful to deal with it in two stages. The contractual narrative is animated mainly by interpretations of historical experiences in western Europe, especially Britain and the Netherlands in the sixteenth to eighteenth centuries. These focus on the ways in which war-driven revenue imperatives might stimulate revenue bargaining and, in the longer term, the emergence of representative, responsive and effective government. In Section 2.4, I sketch out the analytic core of these historical interpretations of the contractual narrative and indicate some of the variants. In Section 2.5, I assess the relevance of that narrative to contemporary developing countries. 2
On power, see Lukes (2005); on the competing notions of the basic role of institutions, see Moe (2005).
Between coercion and contract
37
I end up, in Section 2.6, with two main conclusions about revenue bargaining. First, there is evidence that it is widespread in the contemporary world, and good for the quality of governance. Second, the economic and institutional conditions of contemporary poor countries create scope for a wider variety of patterns of state–society interaction over revenue than were found in ‘historical Europe’. Contemporary revenue bargaining is not always as immediately identifiable as, for example, in England for much of the seventeenth century, and may take a variety of forms. It follows that the policy concern that animated this chapter – the dependence of many contemporary governments on rents rather than on taxes – is valid. In the interests of a better-governed world, we should be thinking of ways of reducing the financial dependence of the governments of many of the poorest countries on aid and natural resource rents. 2.2
Watching my language
Like most debates in political science, the ones I address here have been conducted by a variety of scholars who do not always fully share a common professional language. Many of their core concepts have a high metaphorical content and are not always explained. The same or similar words may be used in different ways. I cannot entirely escape these limitations but will at least explain and justify a few of the less familiar terms I am using. Coercive taxation lies at one end of a continuum. The tax process itself is characterised by variable combinations of: arbitrariness in assessing tax liabilities; coercion in the collection process; and the absence of any representation for taxpayers in arenas where tax policy is decided. The underlying pattern of state–society relations is not significantly contractual: taxes are not exchanged for anything much except, hopefully, the protection of taxpayers from the demands of competing tax-collectors. Contractual taxation involves a more or less explicit exchange of tax revenues for services, and a tax process characterised by institutionalised, negotiable methods of assessing and collecting revenue; the ‘quasivoluntary compliance’ of taxpayers; and a voice for them in setting tax policy. Along with Gerald Easter, in Chapter 3, I label this type of process of assessment, collection and policy-making as revenue bargaining. There are many variants of revenue bargaining. The revenues are taxes.3 Bargaining ranges from (a) direct and explicit haggling and agreement (‘I’ll show you mine if you’ll show me yours’) to (b) indirect strategic interaction and mutual behaviour adjustment without direct 3
Conceptually, we distinguish taxes, which are involuntary levies, from various fees charged by governments for ‘services’. The difference is often rather formal (Lieberman
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Mick Moore
negotiation. Chile’s fiscal pact of 1990 is a contemporary example of the most explicit type of bargaining. At the point of resumption of democracy after seventeen years of military rule, the government, political parties and interest groups negotiated an explicit agreement that specified additional tax revenues and commitments on how to spend them (Boylan 1996; Marfan 2001). To the extent that revenue bargaining is indirect, taking the form of strategic interaction and mutual behaviour adjustment, rather than public haggling and agreements, how do we know it is taking place? Like some other types of political action, this one is not always easily observable. The more observable indicators are (a) the presence of revenue issues on the public policy agenda; (b) collective action by groups of taxpayers around taxation issues, whether through electoral or other channels of representation; and (c) the willingness of government to interact with and respond to taxpayers’ expressed or anticipated preferences in making public policy. If it is so difficult to observe revenue bargaining, how do we know that it is not – at least outside the well-documented cases4 – simply an intellectuals’ construct for trying to make sense of the world? And behind that is a deeper question about the validity of the underlying contractual model of state–society fiscal relations. Given that political scientists sometimes claim that states are autonomous from society or, conversely, that they are captured by specific societal groups, what confidence can we have in an approach that posits that polities are significantly constructed through a process of exchange of fiscal and other resources between states and societal groups? In fact, recent cross-national statistical research has uncovered powerful evidence for the relevance of fiscal contractualism to the contemporary world. Using cross-sectional data for ninety countries over the period 1975–99 and panel data for eighteen OECD countries for 1975–95, Timmons (2005) demonstrates the empirical validity of contractual models of the polity. He posits that, the more a state depends for revenue on taxing its richer citizens, the more it is likely to pursue policies specifically beneficial to the rich – defined as stronger protection for property rights – in order to persuade them to continue to part with their money. Conversely, the more a state depends for revenue on taxing its poorer citizens, the more it is likely to pursue policies specifically
4
2002b). For example, a government could obtain some of the profits from the extraction of natural resources either by charging some kind of fee for access to deposits or by taxing the profits (or turnover, or exports) of the enterprises doing the extracting. Equally, if harbour facilities are in public ownership, then the fees that importers and exporters pay, while technically ‘non-tax revenue’, may not feel very different from taxes. Among the best documented contemporary cases, I would include Chaudhry’s work (1989, 1997) on Saudi Arabia and the Yemen; and Easter’s work on Poland and Russia (Chapter 3 this volume).
Between coercion and contract
39
beneficial to them – defined as spending more money on the provision of public services. Having taken account of other plausible explanatory factors, he finds that the evidence supports both propositions. Other research addresses the more specific question of whether the size of the tax burdens that states lay on citizens ultimately impacts on patterns of governance. It suggests a more direct, immediate and positive causal linkage from the size of tax burdens to the quality of governance than even avid disciples of fiscal contractualism could reasonably have expected. The research has been done in two stages. Examining data from 113 rich and poor countries between 1971 and 1997, Michael Ross (2004) used two different measures of the tax burden and found, for one of them, a statistically significant association between rises in the tax burden and, after periods of three, five and ten years, increases in levels of democracy. James Mahon (2005) has, however, identified some problems with this analysis, notably the fact that, because of limitations in the standard data series, Ross was unable directly and completely to measure the incomes that governments obtain from control of natural resources such as oil and gas. Having undertaken a great deal of primary research to remedy this deficiency, Mahon then replicated Ross’s analysis using this more direct measure of natural resource revenues.5 He found an even stronger statistical connection than Ross between increases in the general tax burden and, within a few years, increases in the degree of democracy. More important, he found that this connection was stronger when the quality of governance was measured not by the degree of democracy but by the extent of liberalism, in the classic sense of the term, i.e. the existence of constraints on state power. As I explain in Section 2.4, this accords with the expectations from theory. In Mahon’s words: ‘We have good support for the idea that the proportion of direct and domestic indirect taxes in state revenues, as opposed to rents from oil, minerals or other sources, is a fair predictor of democracy and an even better predictor of liberalism’ (2005: 7). More generally, we have powerful evidence, from both country case studies and cross-national statistical analysis, of the validity for the contemporary world of fiscal contractualism, i.e. the notion that polities are significantly constructed through a process of exchange of fiscal and other resources between states and societal groups. My quest in this chapter for relevant parallels and differences in the pattern of revenue bargaining between historical Europe and contemporary poor countries is not a wild goose chase. The goose is already in the kitchen and plucked ready for the oven. We just need to work out how best to cook it.
5
And also by using panel-corrected standard errors in the regression analysis.
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2.3
Coercive taxation
Coercive taxation is characterised by arbitrary assessment, coercive collection and the absence of any representation for taxpayers in tax policy decisions. Historically, most taxation has been coercive. Taxation features prominently in many historical accounts of rebellion and revolution, especially in agrarian societies.6 To understand the reasons, it is useful to begin with one of the most robust statistical findings in social science: both over time and cross-sectionally, official tax-collectors in richer countries, and especially in countries with a relatively small agricultural sector, succeed in capturing higher proportions of national income for the government.7 On average, richer, more urbanised economies support a higher tax burden. Part of the reason may be that the effective political demands for public spending are greater in countries that are wealthier and more democratic.8 There is, however, a more important side to the story: it is difficult (a) actually to collect taxes from low-income agrarian economies organised in small enterprises that lack formal, bureaucratic structure and operate without extensive use of banking systems and written or electronic records of economic transactions; and (b) to collect without resort to arbitrariness and coercion. In low-income, agrarian economies, tax gathering tends to be coercive and conflictual, and the overall ‘tax take’ tends to remain low.9 Let us look first at the logistical implications of economic structure and organisation for tax collection; and at the logistical advantages enjoyed by tax collection agencies in wealthier contemporary economies. Four factors facilitate their task and help to explain the historical shift from levying taxes on specific items (salt, tobacco, carriages, individuals) to levying them according to accounting categories (income, sales, turnover, valueadded, profits): 1. Extensive written and electronic records of economic transactions help them to hunt down their quarry accurately and to create effective checks against misappropriation within the tax bureaucracy itself.
6
7
8 9
There was a strong anti-taxation dimension to most of the classic national revolutions in the modern world: the English in the seventeenth century; the American and the French in the eighteenth century; and the Chinese in the twentieth century. For recent statistical evidence on this point, see Cheibub (1998), Fauvelle-Aymar (1999), Piancastelli (2001), Remmer (2004), Ross (2001) and Stotsky and WoldeMariam (1997). The statistical relationship was identified and labelled Wagner’s Law as long ago as 1877. Adolf Wagner (see previous footnote) himself explained his Law in terms of the needs and demand for public expenditure generated by industrialism. The following sections build in part on Ardant’s explanation (1975) of why historically it was difficult to tax subsistence agrarian economies. See also Brewer (1989: 178–90).
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2. The relative insulation of most economic transactions and incomes from seasonality or the weather makes it feasible to collect most taxes in regular instalments over the course of a year. 3. The widespread use of banking and other indirect systems of money transfer reduces the need for tax-collectors to meet personally with most taxpayers.10 4. The prevalence of bureaucratically organised economic enterprises provides opportunities to place the collection process on the impersonal and quasi-automatic basis that underpins most contemporary company taxation and employees’ Pay-As-You-Earn systems. Compare that process with collecting taxes from agriculturalists in poor, agrarian societies. The taxable units are small, so the overhead costs of collection tend to be high. Farm incomes tend to be seasonal and unstable, so collections are occasional and lumpy. The dearth of records of economic transactions and the limited use of banking systems encourage face-to-face interaction between taxpayer and tax assessor/taxcollector, and oblige the latter to make discretionary decisions about tax liabilities that cannot easily be independently validated. Because a relatively large proportion of revenues are anyway eaten up in collection costs, tax administrations are unwilling to separate the roles of (a) assessing liabilities from (b) actual collection.11 The man who tells you what you owe also gets his hands on the money. These logistical factors will tend to endow tax-collectors with considerable discretionary power; to facilitate corruption and perhaps extortion; to increase the ‘leakage’ of tax revenues into private hands;12 to generate resentment and tax resistance
10 11
12
The employment of commercial banks to collect tax dues has been a prominent feature of recent tax reforms in several Latin American countries. The separation of assessment activities from collection and the assignment of different offices or people to each have been central to the construction of non-coercive taxation systems (e.g. Brewer 1989: 101–14; Daunton 2001) and are important components of many contemporary tax reforms (see Chapter 10 this volume). In explaining why the Chilean tax administration is so much more efficient than its Argentinean counterpart, Bergman points out that, in Chile, one department collects and manages the money while another assesses liabilities and enforces the law. In Argentina, all these powers are concentrated in the same department of the tax agency (Bergman 2003: 622). To deal with this problem there are no satisfactory general alternatives to intra-bureaucratic monitoring. In some contexts, rulers have preferred tax farming, i.e. the privatisation of collection. However, the image of the greedy, oppressive tax farmer has thoroughly penetrated public consciousness, and the practice has almost disappeared from the modern world. In eighteenth- and nineteenth-century Britain, the use of lay assessors was one means of guarding against extortion by tax bureaucrats (Daunton 2001: 200–1), but using taxpayers in these roles would inevitably tend to reduce collection levels (Brewer 1989: 100).
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on the part of taxpayers; to establish taxation as the issue of choice for political rebels; and to make it both practically and politically difficult for governments to appropriate a high proportion of national income through taxation, especially direct taxation. In addition, the economic structure of poor, agrarian societies is conducive to coercive taxation for another and more directly political reason. One important motivation for governments to tax moderately and consensually is the expectation that, if taxpayers know their future tax obligations and have confidence that their property rights will be respected, they will be motivated to work harder, invest more and stay put rather than migrate in search of a less extortionate regime. Government and taxpayers both benefit. But that scenario is less likely if the potential taxpayers are poor agriculturalists rather than traders, professionals or controllers of large amounts of capital. First, land is not mobile. Migration means leaving land rights behind. Only at great personal expense can agriculturalists use the threat of emigration to encourage rulers to keep their side of any bargain. Second, in most poor agrarian environments, there is relatively little scope, especially in the shorter term, to increase productivity and incomes through private investments. Rulers who tax peasant agriculture with a light hand may not expect to get much return in the form of a larger tax base. They have weaker incentives to desist from extractive taxation than when dealing with capitalists and skilled professionals. The trick for agrarian rulers is to identify local agents who are able to tax coercively and effectively, and are willing to hand over a good portion of the proceeds to the ruler. Normally, this has involved the recruitment of local economic and political elites as taxcollectors (Daunton 2001: 126–7, 132–4). We can understand why coercive taxation, along with low overall tax takes, is associated with poorer, less literate, less bureaucratic agrarian economies.13 However, coercive taxation is not limited to agrarian 13
This is a statistical probability, not an iron rule. There are significant exceptions in the contemporary world, where the existence of large taxable agricultural exports permits governments to use their bureaucratic resources to extract large surpluses through levying taxes at the point of marketing, through state monopoly marketing boards, or through charging the tax at the point of export (Bates 1981). Similarly, there are several well-documented historical cases of states that, several centuries ago, succeeded in appropriating national income through taxation at ‘modern’ levels (Ferguson 2001: 98–9). Especially under threat of war, overall tax levels, as a proportion of national income, sometimes have increased rapidly (see, e.g., Brewer 1989). Even largely subsistence smallholder agriculture can be taxed at a high level given the political and institutional conditions. The most significant recent case is the British colonial regime in India, which managed to extract high, regular surpluses from a smallholder peasant economy through a land tax. That required a major investment, dating from pre-British rulers, in establishing and maintaining a highly detailed and sophisticated land record
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environments. Elements are found in taxation systems worldwide, especially in countries still in transition from central planning systems, and countries where control of large natural resource rents bolsters authoritarianism generally (see Section 2.5.5). Further, taxes are not raised equally coercively in all poor agrarian environments. More contingent political and institutional factors seem to explain the extent to which the potential for coercive taxation is realised in practice. In the contemporary world, the most consistently coercive taxation appears to be associated with the following combination of factors: (a) poor agrarian environments; (b) revenue raising for local governments; (c) the existence on paper of a wide variety of potential taxes and charges, such that the extraction of money can always be given a formal justification; and (d) the lack of any effective regulation of the process by higher levels of government. More graphically: local government officials, untroubled by any controls from higher levels, raise money by physically going around, visiting homes or markets, or setting up roadblocks, and squeezing whatever money they wish or feel prudent to extract from poor rural people, on any pretext they find convenient, under threat of violence or a spell in the local prison. With variations, this is the story told by Odd-Helge Fjeldstad and Ole Therkildsen (Chapter 5) about contemporary East Africa; by Thomas Bernstein and Xiaobo Lu¨ (Chapter 4) about the more agricultural areas of rural China; and by Rene Prud’homme (1992) about the Congo. These African and Chinese case studies suggest two broad political factors that are likely to encourage local bureaucracies to raise revenues coercively from poor people: 1. The scarcity of alternative sources of revenue or means of extracting it. Higher levels of government may either (a) have appropriated for themselves the more juicy potential local tax bases and/or (b), as in the case in China over the past two decades, have off-loaded large ‘unfunded mandates’ on to local government, requiring them to achieve ambitious public policy objectives without providing financing.14 2. The extent to which the coercive potential implicit in the tax relationship is unrestrained by political institutions, such as effective local
14
system; a high degree of focus of the administration on land records and land revenue; and a reliable mechanism for reducing revenue demands in response to crop failures (Daunton 2001: 126–7). In both China and East Africa, central governments had previously relied significantly on taxes that they later abandoned and turned over to local government – land taxes in China and poll taxes in East Africa – when other more fruitful central revenue sources became available.
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representative institutions, regulation by higher levels of government, or any other mechanism to counterbalance the considerable local power that local agents of the state often enjoy in contemporary (relatively centralised) polities. The recent complaint from the president of the Nigerian National Fruit and Vegetable Traders Union about multiple, illegal levies on his members’ goods as they passed from one jurisdiction to another could have been made in any of several dozen countries (Guardian (Lagos) 25 March 2006). In East Africa, the recent shift from authoritarian or one-party states to more pluralistic polities has given locally based politicians more leverage centrally and is the major reason for the decline of coercive local taxation (see Chapter 5). An important motivation for the recent introduction of elections for village governments in China has been Beijing’s concern about the political unrest arising from coercive local revenue raising, and the search for a check on unrestrained authority at local level (Chapter 4). There are two sets of conclusions about coercive taxation, both of them germane to the later discussion about the contractual alternative. The first set is more analytical and general. Three broad political and economic factors are conducive to coercive taxation: ruling elites that are unrestrained by their subjects (or alternative centres of power) and have no compelling reasons to seek broad support; poor, rural, agrarian, subsistence economies; and revenue sources controlled by potential taxpayers who, faced with high taxes in relation to services provided by the state, cannot credibly threaten to ‘exit’ by moving elsewhere or reducing their level of economic activity. The second set of conclusions is more empirical and topical. In the contemporary world, there is a close linkage between coercive taxation and under-resourced and under-regulated local government, especially in poor agrarian environments. This is a contingent outcome. There is no intrinsic connection between coercive taxation and local government. However, for reasons that will become clearer from later material, revenue bargaining, which is the reverse of coercive taxation, is more likely to take place at a national rather than a local or regional level. 2.4
The contractual narrative in history
The notion that taxation can lead to revenue bargaining – and thereby help make government more representative, responsive and effective – draws much of its inspiration from a set of historical narratives about state formation in the early modern period in Europe, especially the Netherlands, a few city states such as Venice, Genoa and Novgorod,
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and, even more, Britain.15 While the literature coheres around the notion of successful revenue bargaining between rulers and societal elites, different authors tell variants of the same (mainly British/English) story.16 The British case has been very influential for two reasons. First, direct revenue bargaining – the exchange of political representation and power for consent to taxation – was highly overt at particular moments, especially during the Civil War of the 1640s and the elite coup against the Stuart dynasty of 1688 that became known as the Glorious Revolution. Second, the notion that this exchange was one of the pillars of the British constitution specifically, and of limited representative government more generally, became deeply embedded in British historiography and in Anglo-American political culture and discourse (Daunton 2001), and therefore had a significant influence elsewhere in the world. The core narrative relates to the motivations of the two main parties – the ruler and some collectivity of taxpayers – to bargain over revenue. We can assume for this purpose that states are motivated, roughly in this order, by the search for (a) security against threat, (b) revenue and (c) the desire to legitimise rule to reduce the costs of governing. (For the classic discussion of the notion of the revenue-maximising state, see Levi 1988.) Taxpayers are motivated by a desire for both (a) security of life and property and (b) low but predictable taxes.17 The following are the main elements of the core narrative: 1. The context was assumed to be the continual threat or reality of interstate warfare, and of the swallowing by the victors of the polities that could not raise sufficient material resources to compete militarily. The military was the dominant item in the state budget (Brewer 1989: 40; Mann 1993: 373), and needs for war finance were variable and unpredictable.18
15
16 17
18
The main sources from which I have drawn are Bates (2001), Bates and Lien (1985), Brewer (1989), Ertman (1997), Ferguson (2001), Levi (1988), Mahon (2005), North and Weingast (1989), Rosenthal (1998), Ross (2004), Tilly (1992) and Zolberg (1980). For the Novgorod story see Petro (2004). These scholars employ a wide range of methods, from formal, deductive modelling to more traditional historical explanations of single or contrasting cases. For consistency, I have used ‘Britain’ almost throughout, rather than ‘England’, despite the fact that the story is in many respects English rather than British (Brewer 1989: Ch. 1). I implicitly adopt Slemrod’s analytical formula (1992): that the degree of tax compliance by citizens is the result primarily of the costs of compliance or evasion; the extent of perceived return in the form of public goods; and the extent of contingent consent (‘legitimacy’). For recent evidence supporting this framework, see Cummings et al. (2005). Some accounts underplay the significance of the fact that revenue bargaining was most developed in states that specialised in long-distance overseas trading and naval power, notably Britain, the Netherlands, Venice, Genoa (Tilly 1992). Taxpayers faced a variant
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2. Apart from occasional dependence on ‘subsidies’ from foreign rulers, the Crown faced two main alternatives to revenue bargaining. The first was own sources of revenue, from state/royal property or prerogatives.19 The disadvantages of ‘own revenues’ lay in the obstacles to acquiring and preserving adequate state property, and in expanding income quickly in case of threat of war. The second alternative was dependence on unilateral, coercive taxation. This tended to generate resistance and high collection costs. Tax collection agents operating coercively were well placed to appropriate a large proportion of the proceeds for themselves. Overall, coercive taxation tended to generate low and unreliable revenues, which could not quickly be expanded in response to the threat of war. Polities dependent on ‘own revenues’ and/or coercive taxation were ill placed to survive threats from states that benefited from a better method of raising finance. 3. That better method was contractual taxation arising out of revenue bargaining. Within the boundaries of individual states, revenue bargaining offered joint gains to both rulers and taxpayers. If rulers and representatives of the main potential taxpayers could jointly agree on both a taxation regime and a set of policies for the use of revenues, then, compared to the alternative modes of state financing, several benefits followed. First, because taxes were jointly agreed, taxpayers delivered more willingly, and the processes of tax payment and collection became less onerous and costly, and more predictable. Second, with better knowledge of likely future obligations and revenues, and
19
of the classic commitment problem (Weingast 1995): having voted the taxes for the ruler to arm himself, how could they be sure that he would resist the temptation to use these arms against them and in future extract taxes by force? It is one of the recurring themes of British historiography that the preservation of ‘liberty’ and parliamentary government depended, in part, on the fact that British military power was principally naval, and that naval power was ill-suited to repress the domestic population (Brewer 1989: 9–10). This knowledge would, presumably, have encouraged taxpayers to agree to a bargain that they might not have accepted had they been asked to finance what was then termed a ‘standing army’. In addition, there were clear and close synergies between the interests of merchant-taxpayers engaged in (increasingly global) long-distance trade and a strategy of building national naval power. Both benefited from the development of shipbuilding industries and port facilities. Manpower and ships could be shifted between ‘military’ and ‘trade’ uses. Success in global trading depended, above all, on having national military support to protect overseas trading locations from competing European trading powers, to open foreign ‘markets’ by force and to safeguard trade routes against predators of various kinds. From the perspective of the merchant-taxpayer class, voting taxes to develop national naval power was potentially much better for business than equipping a land army. Empirically, the sources of ‘own revenues’ were quite diverse, and comprised, in addition to royal/state property in the strict sense of the term (including property confiscated from the church or internal opponents) (a) the sales of offices and titles, and (b) various types of ‘fines’ levied unilaterally on property owners.
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protection against arbitrary levies, taxpayers felt more secure in making economic investments and rulers could undertake long-term planning more effectively. Third, having a forum in which revenues were exchanged for policies encouraged the search for policies that were mutually beneficial to the main parties. For example, a commitment to strengthen the (British) Royal Navy to push Dutch merchants out of North America would, if successful, generate more security and more trade for competing British merchants, more business for the ports of London, Bristol and Plymouth, and higher revenues for the Crown. Fourth, taxpayers would be more likely to respond positively to emergency calls for war finance if they were already implicated in, or responsible for, major public policy decisions. 4. The benefits of revenue bargaining to the ruler could motivate him either to establish institutions to represent taxpayers if none existed, or to strengthen and cede more powers to those representative institutions which did exist. 5. The arrangements sketched out above gave rise first to the tax state, i.e. a state that was financed primarily through broad taxation. In some cases, the tax state evolved into a superior life form, the fiscal state, i.e. a state that was able to use a secure, effective and consensual tax system as the basis on which it could engage in large-scale borrowing in private markets. Historians have explained the role and rise of the fiscal state in terms of its greater capacity, even compared to the tax state, to raise the financial resources to cope with emergencies, above all with war. Even the best taxation systems may not yield very large increases in revenues in the short term. The competitive military edge came from the ability to borrow, quickly and cheaply, on the strength of lenders’ confidence in the willingness and capacity of the government to repay through future tax revenues.20,21 This core narrative focuses on the motivations for revenue bargaining. The outcomes are not only those mentioned or implied above: a larger and more stable revenue system; institutionalised representation for (some) citizens; institutionalised constraints on state power; a more 20
21
In explaining the power of the fiscal state, some scholars have placed emphasis on the role of institutionalised revenue bargaining in resolving what is termed the ‘commitment problem’: financiers would be more willing to extend loans, at lower rates of interest, to rulers whose power was limited by Parliament, because this would provide a guarantee against the ruler using his coercive power to renege on the deal (Bates 2001: 77). It is virtually impossible to test the explanatory power of different versions of the same basic narrative. There is a note of Anglo triumphalism in some versions of this story: the suggestion that the British got it right and the others, notably the French, got it wrong. For some useful correctives, see especially Ertman (1997) and Rosenthal (1998).
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predictable environment for private investment; and policy debate and cooperation between states and (some) societal interests. In addition, the greater consequent dependence of the state on taxes, rather than on ‘own revenues’, should have three broad positive consequences for state and nation-building. First, rulers dependent on taxes would have a more direct stake in the prosperity of (some or most of) their citizens, and therefore have incentives to promote that prosperity. That in turn would generate more revenues and strengthen the state. Second, dependence on taxes promotes a modern, bureaucratic state: by encouraging the creation of reliable records of taxpayers, their activities and assets; and by obliging the state to invest in the creation of a relatively reliable, uncorrupt, professional career public service to assess and collect dues, and then hand them over to the state treasury.22 Third, tax collection necessitates the collection of a great deal of information, which can in turn contribute to better policy-making (Brewer 1989: especially Chs 4 and 8). This is not directly a story about democracy. Levi (1999a: 117) seems to get it right in suggesting that accounts of revenue bargaining ‘offer better and more convincing accounts of the emergence of protodemocracy than of democracy’.23 The statistical work by James Mahon (2005) reported in Section 2.2 points the same way: the dependence of contemporary governments on general taxation is more strongly associated with liberal rule (i.e. institutionalised constraints on state power) than with democracy. It is, however, a beautiful story – about the creation of state capacity of various kinds, the expansion of the authority of the sphere of political representation and the establishment of accountability to citizens and limits on autocratic state power. It captures important aspects of the realities of state formation in Europe, especially but not only in Britain in the sixteenth to eighteenth centuries.24 It is not a
22
23
24
Brewer’s account (1989: 101–14) of the organisation of the Excise in eighteenth-century Britain illustrates this line of argument vividly. Perhaps the best contemporary scholarly research on this issue – and on the broader question of how revenue sources shape states – has been done on Saudi Arabia and the Yemen by Chaudhry (1989, 1997). Some scholars who have written about revenue bargaining have indeed asserted a direct link to democracy (e.g. Ross 2004). Others have made more modest claims about representation and limited government. The critique of some of this literature by Herb (2003) is marred by his failure to distinguish ‘representation’ from ‘democracy’. Two moments were central to the realisation of these dynamics in British history. The first was a sequence of conflicts between the Stuart monarchy and a large fraction of the landlord and merchant elite, which intensified in the 1630s, and led to civil war in the early 1640s. The conflicts initially centred on attempts to use Parliament and a more independent judiciary to protect (elite) property rights in relation to the Crown, to limit the capacity of the Crown independently to raise military forces, and therefore to make
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unique, blueprinted story: the cases vary, and different scholars interpret the same cases slightly differently. In examining the scope for revenue bargaining in contemporary poor countries, one should not be seeking a replication of a precise set of conditions or processes. 2.5
The determinants of revenue bargaining
The previous section suggests that there are many potential benefits of revenue bargaining to the main parties involved. But we know that attractive social arrangements often never get beyond the drawing board, even when they appear to be in the general interest. Politics intervene, notably in the form of particularistic interests and the unequal capacity of different interests to mobilise. Let us look again, analytically, at the politics and motivations about revenue bargaining in early modern Europe. What conditions were especially likely to encourage rulers and taxpayers actually to bargain around exchanging institutions (political representation) for resources (taxes)? In what circumstances was a deal attractive? And why were these actors motivated to bargain about political institutions rather than simply about specific policies? Eight factors seem to have been particularly important: 1. The states in which revenue bargaining emerged were ruled either by dynasties or self-perpetuating merchant oligarchies that had good reason to expect to remain in office provided they ruled well. They had sufficiently long-term perspectives that they might be willing to make concessions involving some immediate sacrifice of power in order to strengthen their system of rule. 2. From a fiscal perspective, states were largely war machines. They spent relatively little on other things; and had slight non-military expenditures and few non-military personnel to divert to their armed forces when war threatened. They therefore faced compelling pressures to increase revenue at the same time as they confronted military more taxation contingent on Parliamentary consent. Independent Protestant denominations helped radicalise the parliamentary cause. After a period of republican rule, the Stuart monarchy was restored in 1660. Although Parliament had established control of most sources of state revenue, many issues of religion, the judiciary and fiscal authority remained unresolved (Braddick 1996: 11–13). In 1688, in response to the intransigence and strong Catholic leanings of King James II, most of the elite supported a coup, the ‘Glorious Revolution’, which transferred the throne jointly to the king’s daughter and her husband, the ruler of the Netherlands. Partly because this was followed by a period of intense warfare with France, power sharing between the Crown and Parliament became institutionalised. Such was the reputation of the new regime for fiscal reliability that, within a couple of decades, it was financing itself heavily from loans advanced on the basis of a sound revenue-raising system. Britain became a powerful fiscal–military state (Brewer 1989; Daunton 2001: Ch. 2).
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3.
4.
5.
6.
7.
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threats, and thus were provided with recurrent opportunities to do a deal with organised taxpayers.25 Because states had few sources of (large, expandable) revenues other than general taxation, they faced strong incentives to negotiate that taxation with (larger) taxpayers. Where state power was centralised – and actual tax collection largely in the hands of officers of the central government – taxpaying elites had strong incentives to engage in collective action at the national level to bargain with the state, and were less vulnerable to being played off against each other on a regional basis (Brewer 1989: Ch. 1 and 127–9). Large taxpayers were more likely to engage in collective action around taxation if they otherwise had similar material interests, shared a common cultural background or were similarly placed in relation to the state.26 Because institutionalised domestic political restraints on rulers were few, any societal group had reason to fear that rulers would renege on agreements once it was expedient for them to do so. This provided societal groups with incentives not simply to reach policy bargains with rulers, but to institutionalise their power in representative policymaking institutions such as parliaments in order to enforce those bargains. The existence of mobile tax bases, especially capital-intensive transnational trading enterprises, provided strong incentives for both taxer and taxpayer to engage in revenue bargaining.
For a nuanced discussion of the possible effects of perceptions of threat on revenue bargaining in various European historical scenarios, see Rosenthal (1998). For example, it is one of the most widely accepted generalisations about British history that, compared to many other European countries, wealth acquired through trade, capitalist enterprise and imperialism was easily absorbed into rural landlordism, and landlords were often involved in trade, capitalism and imperialist enterprise. Similarly, the British elite was more able to engage in collective action because of its relative material independence of the Crown. On the one side, the elite was profiting from (overseas) trade. On the other, it did not to any significant degree depend for income on regular employment in state service. Unlike many other polities, including the great empires – such as tsarist Russia (Pipes 1974: especially Ch. 4), colonial India (Washbrook 1981) or Imperial China – there was no great state bureaucracy manned by the elite. Shue (1988: 91–102 and passim) explains how Chinese history in part revolves around the fact that the ‘gentry’ were closely tied to the state through their roles in the imperial bureaucracy, as local administrators and as actual or potential members of the Mandarin class (of senior career public servants). This strategic position enabled the ‘gentry’ to excuse themselves from paying most taxes (Wong 1999: 99). Tied to the state through competition for bureaucratic position, and lacking any clear conflict of class interests in relation to the state, they were incapable of unified political action.
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8. Most fiscal transactions were intranational. In particular, governments obtained taxes – and, later, loans – mainly from their own citizens. If agreements between rulers, taxpayers and financiers were feasible, they could be embedded within national political institutions, and become mutually reinforcing.27 We can summarise these incentives to engage in revenue bargaining as follows: The state: state elites had relatively long-term perspectives, presided over state apparatuses that were war machines and lacked major non-tax revenue sources. They were therefore especially vulnerable to pressures to negotiate with taxpayers as war threatened. Taxpayers: taxpayers enjoyed many of the conditions conducive to collective action, and had incentives to lock state elites into institutional arrangements that gave them, the taxpayers, continuous influence over policy. Revenues sources: mobile capital assets were important potential revenue sources. There are especially large potential joint gains to both taxer and taxpayer from revenue bargaining around mobile capital assets. Political context: the prevalence of interstate war and the integrity of the state as a fiscal and political unit provided strong incentives for political actors to reach agreements within the political space defined by the boundaries of the nation-state (Mann 1993: 31–3). There is a ninth factor that is more endogenous to the story: a degree of path dependence in the ability of representative assemblies to influence fiscal policy. The emergence and consolidation of revenue bargaining was dominantly an incremental process. Assemblies that already had a recognised role in collecting taxes or influencing fiscal policy were well placed to expand their authority.28
27
28
In the early eighteenth century, when Britain had become a fiscal state, the government was able to borrow heavily on the strength of its tax system, and the management of public debt became a major issue in fiscal policy and in political debate. Government borrowing was virtually all from domestic sources. Some historians argue that this strengthened revenue bargaining. The elite was still relatively unified and bondholders overlapped substantially, at the level of individuals or families, with large taxpayers and legislators. Members of these three intersecting groups – bondholders, large taxpayers and legislators – would be able to cross-reference a great deal of fiscal, policy and political information. This would both (a) strengthen the accountability of the regime to taxpayers in Parliament and (b) enhance the overall level of trust in government, and thus the scope for the state to borrow cheaply (Ferguson 2001). MacDonald takes this line of argument further, suggesting that polities indebted mainly or solely to their own citizens embody a type of accountability superior to that embodied in electoral democracy. In his own words, the ‘citizen creditor’ is the ‘hero of our tale’ (MacDonald 2003: 471). Comparing the trajectories of the many representative assemblies which existed in early modern Europe, Herb (2003) found that those that were in some way directly involved in tax collection, including the English Parliament, were more enduring.
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This is not a list of tight preconditions for revenue bargaining in early modern Europe. It is rather a list of those variable factors that seem to have been especially conducive to that result. To what degree are these or similar factors operative in contemporary poor countries, which are in many ways very different from historical Europe, but similar to the extent that capitalist relations of production are dominant but not ubiquitous? The polities of the contemporary developing world are so variable, not so much in formal structure as in the ways in which states relate to citizens (Tilly 1992: 195), that any answer has to be highly schematic and qualified.29 We can, however, begin to move towards answers by listing some of the key ways in which the environmental factors affecting the prospects for revenue bargaining in contemporary poor countries differ, typically and on average, from those listed above for early modern Europe. In Sections 2.5.1 to 2.5.5 below, I examine the implications of the following (stylised) differences between these two contexts: 1. Changes in the character of warfare. 2. Growth in the size and complexity of the state apparatus. 3. The shift to regimes and governments which are more vulnerable to internal displacement, whether through electoral or other channels. 4. The emergence of ‘modern’ economies characterised by the formalisation and bureaucratisation of economic enterprises; the importance of mobile economic assets; the expansion of commercial and capitalist economic relations; and the internationalisation of economic and financial relations. 5. The contemporary availability of large economic rents. 2.5.1
The character of warfare
The historical literature on revenue bargaining emerges in large part from attempts to explain why some European states had managed to compete successfully in interstate warfare and to strengthen themselves internally in the process. It is understandable that some scholars have then raised the question of whether the poor record of state-building in parts of the contemporary South is to be explained in terms of the lack of sufficient interstate war at the appropriate historical moments. Interstate war is far less frequent today than in historical Europe. Conversely, intrastate wars are today very common in the poorer parts of the world (Fearon 29
For excellent comparative scholarship examining state–society interactions around taxation, and their relationship to state formation in the twentieth century, see Chaudhry (1989, 1997) on Saudi Arabia and Yemen, and Lieberman (2001, 2003) on Brazil and South Africa.
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and Laitin 2003). There are then two issues to be examined. The first is whether interstate warfare is central to the revenue-bargaining story. The second is how contemporary intrastate wars might affect revenue bargaining and state formation. Do we need war to create effective and accountable states? This question gives rise to an array of fascinating intellectual challenges and some rather strong emotional reactions. I can largely bypass both the fascination and the emotion by explaining how contingent inter-state warfare actually is to the revenue-bargaining story, and peripheral to the contemporary relevance of that story. Analytically, there are two intermediate links in the causal chain between interstate war and revenue bargaining: first, war generates a threat, as perceived especially by the state; then the sense of threat leads to the search for higher state revenues, which in turn, for the reasons sketched out in Section 2.4, in some circumstances encourages revenue bargaining. It certainly seems true that, in some parts of the contemporary world, the absence of external threats to states has reduced their incentives to raise revenue. For example, it is now widely accepted that the de facto international guarantee of most borders in Africa between decolonisation in the 1960s and the end of the Cold War helped make some African states ‘lazy’ from the geopolitical perspective: unmotivated to rule their frontiers and all their populations very actively, and therefore relatively unmotivated to tax widely (Herbst 2000; Jackson 1990). But neither war nor the threat of war is required to make contemporary state elites feel threatened or to motivate them to raise a great deal of revenue. War is far from the only source of threat to them. Contemporary state elites are often subject to high performance expectations on the part of their citizens, and judged in terms of some combination of democratic or popular legitimacy and ‘delivery’. Failure to ‘deliver’ – by, for example, not alleviating famine, curbing inflation or maintaining high levels of employment – might easily put contemporary governments and regimes under clear threat of displacement from internal sources. For example, Doner, Ritchie and Slater (2005) show how internal popular threats motivated ruling elites to construct effective developmental states on East Asia in the later twentieth century. The threat of war was a powerful driver of revenue demands in ‘historical Europe’ because rulers spent little money on anything other than the military. Modern states face many other pressures to raise and spend money on a wide range of welfare, developmental and regulatory activities. The case that context shapes the effect of war on state-building has been made particularly well by Miguel Centeno (1997, 2002) in his work on nineteenth-century Latin America.
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War-driven revenue imperatives are not needed to trigger the revenuebargaining process. What about the warfare that impacts most on contemporary poor countries? This is not classical interstate contestation, but the ‘new wars’: rivalries between armed groups largely resourced by and motivated to capture material assets of ‘global’ origin (see Fairbanks 2002; Jung 2003; Munkler 2005; and, on contemporary Africa, Reno 2002). The combatants treat conflict as a source of livelihood and are more interested in protecting and extending their capacity to plunder than in reaching a political resolution of their differences. I say a little more about the resources that fuel these intrastate and cross-border wars in Section 2.5.5. The main point here is that, by providing actual or potential state elites with incentives to take the armed route to earning large incomes, these resources – and the ‘new wars’ that result – create no incentives for revenue bargaining, and destroy rather than build states. 2.5.2
The size and complexity of the state apparatus
The states that were militarily successful in historical Europe went on to become substantially civilianised: they developed large civilian organisational apparatuses and civilian welfare programmes; came more under the democratic political sway of organised civilian interests; and began to appropriate and spend much higher proportions of national incomes (Tilly 1992: 206). In organisational form at least, this complex, civilianised, high-spending state has become the world norm. From a fiscal perspective, it is more complex than the early modern European state. Routine fiscal operations are managed by specialist networks of government bureaux (Schick 2002). The details of public finances are no longer immediately accessible to the average intelligent citizen. We can be sure that this has affected patterns of state–society relations and the potential for revenue bargaining. The impacts are likely to be so dependent on context that I can do no more here than suggest three potentially significant general processes: 1. The fiscal institutions of the liberal democratic state have now become almost universal, at least in form and norm. If governments do not declare an annual revenue and expenditure budget, submit it to the legislature for approval and appear to organise some kind of quasiindependent scrutiny of how public money is spent, then, in most contemporary states, there is something to explain. That is a powerful potential stimulus for public dialogue over taxation issues and collective action by taxpayers. 2. Partly because contemporary states have been raising significant tax revenues for long periods of time, they often preside over complex
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taxation regimes, characterised by a diversity of different taxes, a wide variety of rates, an abundance of exemptions and ambiguity in legislation or assessment procedures. The tax regime itself may influence the potential for taxpayers to engage in collective action, albeit in a variety of ways.30 For example, distinctively different taxes, levied on very different bases, might lead to political conflict between one group of taxpayers (e.g. corporations) against another (e.g. individuals liable to income tax). Alternatively, a complex taxation system with a variety of discretionary exemptions will tend to motivate taxpayers to neglect collective action and to engage instead in individualised strategies to solve their problems, whether through bribery or employing expert tax advisers.31 Again, a very complex tax and fiscal regime, especially one hobbled by extensive constitutional and legal restrictions on the fiscal authority of government, might be designed and employed to fool most taxpayers into political passivity and to benefit political elites. Latin America is distinguished by regressive taxation systems that depend heavily on indirect sales and consumption taxes bearing mainly on the poor. Wealth and income – and especially individual rather than corporate wealth and income – rarely have been subject to significant direct taxation, despite substantial histories of popular and leftist political mobilisation. For a classic expose´ of the extent to which Central American taxes are regressive, and the political reasons, see Best (1976). Outnumbered in electoral politics and legislatures, Latin American political elites have been unable to prevent increases in public spending or to block tax legislation that, in principle, targets income and wealth. They have instead used their influence to create systems full of legal and institutional obstacles to the actual collection of wealth and income taxes (Mahon 2004: 10). 3. Most important perhaps, contemporary states routinely spend a great deal of money on activities less immediately pressing than war: on popular education, health, pensions, child allowances, unemployment pay, job training, disability allowances, etc. As suggested by the summary in Section 2.2 of Timmons’ research (2005) on contractual explanations of fiscal behaviour, contemporary governments tend to bargain with citizens about patterns of public expenditures as much as 30
31
The underlying analytic framework is polity-centricity: the observation that the nature of public policy arenas, public programmes and the public organisations that implement those programmes help shape the ways in which citizens engage politically (Skocpol 1992: 47–60). I am indebted to John Toye for this point. To the extent that this is true, then the process of simplifying tax regimes that has been under way in many countries over the last two decades should increase the chances of collective action by taxpayers (see Chapter 10 this volume).
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about revenue raising. Indeed, where citizens do not finance the state through taxes, public expenditure may dominate the fiscal political agenda (Moore 2004b). The extent to which expenditure concerns will dilute, fragment or solidify the political organisation of taxpayers qua taxpayers will be highly dependent on context. 2.5.3
The anticipated permanency of regimes and governments
Revenue bargaining represents investment by the state of limited political and organisational resources in a long-term project of institutional reform. It constitutes a political risk: the sacrifice of some power, possibly to potential direct competitors, for an uncertain reward. It is possible that, by the time the political investment begins to generate returns in the form of additional tax revenue, an opponent will be in power. It seems highly plausible, from a deductive perspective, that governments (or regimes) which feel very insecure will, if they have alternative revenue sources, be especially unlikely (a) to raise taxes or (b) to engage in revenue bargaining to do so (Levi 1999a: 115). In the contemporary developing world, many governments seem insecure, and ruling elites are replaced more often than in historical Europe.32 How does this affect the scope for revenue bargaining?
32
We cannot directly measure the sense of security of governing elites. We can measure frequency of actual changes of rulers, regimes or governments, albeit with limitations on direct comparability across different types of polity. Nevertheless, the figures demonstrate clearly the much greater frequency of what we will generically term ruler change in contemporary developing countries compared to historical Europe. In historical Europe, three large polities – France, England and Sweden – had a continuous existence within similar basic borders over the period 1500–1800. All were monarchies for almost the whole period. On average, monarchs (or fleeting equivalents, like the Lord Protector in London) were replaced every 17.5 years. (The average comes nearer to 16 years if we try to take full account of all changes in rule during periods of great political instability in France in 1793–5 and in England in 1649–53.) The most widely available equivalent statistic for contemporary developing countries, found in the Polity IV database, refers to the frequency of changes in regime. A change in regime is a change in system of government and is, at least in principle, more radical than a mere change in monarch. Regime stability can coexist with frequent changes in government, in the conventional sense of the term. India, for example, has experienced no change in regime since 1947, but many national governments have come and gone in Delhi. Over the period 1960–2004, in the 123 developing countries for which Polity IV provides data, there was a regime change on average every 12.3 years. We then looked at the frequency with which, in the 16 polities that were continuously democratic over this period – as defined by Freedom House – one ruling party was succeeded by another. This required a little subjective judgement, because of changes in party labels, etc. Our figure of 9 years is thus an approximation to the underlying reality, but accurate enough to help validate our basic claim that there has been more recent ruler change in contemporary developing countries than in historical Europe (I am grateful to Nardia Simpson for these calculations).
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Using recent cross-national statistical data, Cukierman, Edwards and Tabellini (1992) and Fauvelle-Aymar (1999) have tested variants of the proposition that political instability makes governments reluctant to raise taxes. Cukierman, Edwards and Tabelin found that political instability is associated with higher degrees of dependence on seigniorage – the inflation tax. Fauvelle-Aymar found that instability is associated with lower overall tax levels. That might suggest that democratic turnover of governments will tend to reduce the tax take. However, Cheibub (1998) finds that contemporary democracies are just as effective as non-democracies in raising taxes. There is no contradiction here. Democracy increases the potential rate of turnover of governing elites, but increases the chances that a particular group, once displaced, will have the opportunity to return to power in the future. We have no reason to believe that, on average, the relatively high rate of turnover of contemporary governments is in general a disincentive to revenue bargaining. 2.5.4
Economic ‘modernisation’
Compared to the economies of historical Europe, those of contemporary developing countries are likely to be characterised by (a) more formalised and bureaucratised economic structures and enterprises; (b) a more prominent role for mobile economic assets; (c) more widespread commercial and capitalist economic relations; and (d) the internationalisation of economic and financial relations. Again, these changes are likely to have diverse and contradictory implications for the incentives and opportunities to engage in revenue bargaining. I can do little more here than sketch out the most likely causal connections. As I explained in Section 2.5.3, a more formally organised modern economy, with larger enterprises keeping written or electronic records, is relatively easy to tax in a logistical sense. However, the increasing importance of mobile economic assets – first industry and services rather than agriculture, now the ‘knowledge economy’ in which value is often deeply embedded in highly skilled professionals and in personal and institutional networks – will tend to increase the costs to government of attempting to tax coercively, because taxable assets may move to other jurisdictions. Taken jointly, these two processes increase the incentives for both states and citizens to engage in revenue bargaining. Conversely, the other two dimensions of economic modernisation listed above have rather more ambiguous consequences. Let us define capitalism as a system in which the driving motivation is to reinvest the economic surplus in new production activities. The expansion of capitalist relations of production increases incentives to bypass overt,
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direct revenue bargaining in favour of indirect strategic interaction between the state and controllers of capital. Capitalism – and especially globalised capitalism with few effective restrictions on trans-border capital flows – amplifies the scope for controllers of capital to ‘punish’ overzealous tax-collectors without having to face the problems of coordinating effectively with one another and agreeing on collective action. In contemporary market economies, controllers of capital do not need to organise and coordinate their actions to exercise influence – although they often do so. They can rely, to a substantial degree, on the fact that, even without coordination, they will all tend to respond in the same way to the same situation. If government suddenly increases the tax rate – or otherwise does something that capital does not like – then most capitalists can rely on most other capitalists to respond with some combination of the ‘mobility’ options discussed in Section 5.3: reducing productive investments and moving capital out of the country. Then the rate of economic activity, employment and tax revenues will all tend to decline, and government will begin to pay a political price.33 It is through these mechanisms that capital can ‘discipline’ contemporary states without becoming directly engaged in politics (Winters 1996). Taxpayers, qua taxpayers, do not enjoy the same quasi-automatic influence. It is not enough that they collectively control vital financial resources. They need to coordinate the way they use those resources if they are to exercise power. Just as international capital mobility can increase the bargaining power of the controllers of capital in relation to national governments, the globalisation of financial relations and institutions more generally can give governments more options in seeking loans, and thus reduce their immediate dependence on taxpayers-cum-financiers located within their own borders. In the long run – and unless the ‘loans’ are disguised subsidies – governments can borrow commercially only if they are believed to have an adequate revenue base. Taxpayers matter. But, if they are borrowing on international markets, governments have some scope to give themselves some autonomy from their taxpayers, by using privileged information about complex financial calculations, and by shaping perceptions of what economic and financial policies are inevitable or desirable.34 Conversely, more bargaining power in relation to domestic taxpayers might come at the price of dependence on the International 33
34
The extent will depend in part on how far capital and capitalists are locked into activities – such as mining and natural resource extraction, or enterprise that depends heavily on political links with government – from which they cannot easily withdraw temporarily without incurring heavy long-term costs. I am grateful to James Mahon for giving me access to a draft manuscript that deals in detail with this point.
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Monetary Fund (IMF). The governments of many poor countries need the approval of the IMF to access international loan markets on reasonable terms. In some cases, the IMF has assumed what many would see as the historic role of taxpayers-in-assembly: ‘one might take the IMF to be acting as a kind of upper house or appropriations committee ‘‘representing’’ Latin American taxpayers with its combination of sufficient expertise to design tax legislation and sufficient power to deny critical resources to the executive’ (Mahon 2004: 26). Mahon goes on to point out that, as the representative of creditors, the IMF has an interest in a strong taxation system, so that creditors can be repaid. However, it may at times favour the interests of bondholders if they come into conflict with those of taxpayers (ibid. 26), to the extent that the IMF sometimes appears responsible for ‘squeezing’ poor-country taxpayers by insisting that governments meet demanding revenue targets (see Chapter 10 this volume). It seems to be this combination of contradictory pressures that has led many governments, especially during recent decades of economic globalisation, to engage in weaker forms of revenue bargaining: reforming their tax collection systems by making them ‘user-friendly’ in relation to larger businesses, rather than renegotiating them openly with taxpayers generally in electoral and legislative domains (see Chapter 10).35 2.5.5
The emergence of large economic rents
Revenue bargaining is unlikely if rulers have good access to sources of revenue other than general taxation. In long-term historical perspective, non-tax revenues have been very widespread. More recently, among the more powerful European states, the main alternative to the ‘bourgeois’ path of revenue bargaining was the entrepreneurial development and exploitation of ‘own revenues’. In the nineteenth century, the more authoritarian continental European states, particularly Prussia and Austria, developed state property – notably railways, post offices and mines – into major income sources (Ferguson 2001: 57–8; Mann 1993: 381–8). In essence, this is little different from the state financing strategy employed by the centrally planned economies of the twentieth century. Under those regimes, most state revenue was a surplus accruing from control of the most productive assets and enterprises; tax administrations 35
The structure of private business in many smaller developing countries tends to encourage such behaviour. It is often dominated by a small number of large firms, often transnationals, which account for a high proportion of the effectively taxable economy, and therefore for a high proportion of (direct) tax receipts. For example, it was recently estimated that more than 40 per cent of revenues from direct and general sales taxes collected by the Peruvian government come from fifty-four taxpayers (Mostajo 2004: 4).
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were very weak. The strategy of relying on ‘own revenues’ can be successful where the state can largely exclude competitors seeking to provide the same service and can supply the organisational competence needed to manage the assets and deliver the revenues. Only in exceptional circumstances is this possible in modern capitalist economies.36 In most contemporary poor countries, publicly owned enterprises are a drain on the treasury rather than a source of revenue. By contrast, many contemporary poor governments enjoy very large non-tax incomes from unearned sources in the form of rents from natural resources (for the concept of earned and unearned state income, see Moore 1998). There is very little historical precedent for this situation. It results from the interaction of two structural features of the world economy of recent origin: a very high degree of income inequality between rich and poor nations (Maddison 2001: 126); and processes of globalisation – particularly falling international transport and communication costs – that make it feasible for poor regions to obtain a large proportion of their income from supplying high-income markets elsewhere in the world with commodities that are objectively scarce, notably oil, gas, diamonds and a range of minerals.37 Because those commodities are scarce and valuable, very large rents (super-profits) often accrue to those who control their production or export. During the 1990s, when international oil and gas prices were much lower than they have been in the early years of the new century, natural resource rents accounted for about a fifth of the total GNP of the countries of the Caspian Basin and the Middle East, and around 7–8 per cent for sub-Saharan Africa.38 These rents can be appropriated politically and producers still be left with enough profit to continue mining or pumping.39 The rents are irresistibly attractive to most governments, especially in poor countries. We do not know exactly what incomes accrue to the majority of the governments that control the most rent-rich natural resources. Payments made to governments are often confidential; government 36
37 38 39
For example, the government of Singapore has long largely financed itself from property development and from monopolistic provision of lucrative port, airport and transport services. The long-term availability of large natural resource rents is a very recent phenomenon. It dates essentially from the large increases in international oil prices in the early 1970s. These figures are based on estimates from the World Bank on the rent proportion of the value of natural resource production (Hamilton and Clemens 1999). Rent refers to that proportion of the sales value of a product that remains after all production and marketing costs, including some allowance for ‘normal profit’, have been accounted for. Rents may be very high on some natural resource extraction activities. It may cost only a couple of dollars – a small fraction of its sales price – to obtain a barrel of oil from beneath a desert.
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accounts are secret or misleading; and national oil and gas corporations are often secretive states-within-states (e.g. see Winters 1996). We do, however, know that, in poorer countries at least, states (and state elites) have incentives to treat natural resource enterprises very differently from capitalist enterprises and succeed in getting their hands on a high proportion of the rents. While there remains considerable debate about the mechanisms through which the availability of natural resource rents affects polities, the broad outcomes are very clear. There is a great deal of cross-national statistical evidence that natural resource rents are associated with higher levels of authoritarian rule and with lower levels of democracy and of the rule of law.40 The strategic rents that many contemporary poor governments obtain from large inflows of development and military aid equally have little precedent in history, at least at the levels experienced by contemporary poor governments, some of which might obtain half or more of their income from this source. We know the magnitudes of these inflows, because they are mostly recorded at the donor end at least. There is every reason to believe that they are generally much less toxic to polities than are large natural resource rents. Leaving aside those declining number of cases where global or regional powers ‘buy’ local governments and keep them in power, aid donors tend not to be very generous to vicious or repressive regimes. However, large aid inflows – and many governments of poor countries are principally funded through aid (Moore 1998) – do seem to reduce the scope for revenue bargaining. We cannot gauge that directly but can measure some of the correlates. High aid levels appear, over time, to reduce both the overall tax take (Bra¨utigam and Knack 2004; Remmer 2004) and the quality of government institutions (Bra¨utigam and Knack 2004; Knack 2001). For a recent review of
40
See especially Esanov, Raiser and Buiter (2001), Fearon and Laitin (2003), Jensen and Wantchekon (2004) and Ross (2001). Note that in these studies the independent variable is some measure of the value of mineral resource production or exports as a proportion of total national income or exports. In principle, a measure of the value of mineral resource rents as a proportion of total income would be preferable. Readers who are uncomfortable inferring causation from statistical analysis might like instead to look at Winters’ (1996) account of how changes over time in the availability of oil rents to the New Order Regime in Indonesia affected the character of governance. There are studies of the effect of natural resource extraction on tax, and they generally suggest a slackening of the tax effort (e.g. Cheibub 1998: 363; Stotsky and WoldeMariam 1997). However, they are hard to interpret, since governments appropriate mineral rents by a variety of means, overt and covert, including both tax and non-tax channels (Cheibub 1998: 359–60). There are questions about the accuracy of the data used in large cross-national samples. See also Mahon (2005).
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research on the effects of high aid levels, see Moss, Petterson and van de Walle (2006). In general, the governments of many contemporary developing countries have access to very large non-tax revenues that have few historical parallels; free them from dependence on local taxpayers; especially in the case of large natural resource rents, tend to have a range of rather toxic effects on their polities;41 and, most directly relevant here, obviate the need for revenue bargaining with the generality of potential taxpayers. 2.6
Conclusions
This chapter has addressed two main related questions. The first concerns the circumstances in which taxation is more or less coercive or contractual. The news is fairly good. The most coercive taxation is found in circumstances that are becoming less common. Taking a broad historical perspective, coercive taxation is especially likely where ruling elites are unrestrained by their subjects and have no compelling reasons to seek their broad support; economies are poor, rural, agrarian and subsistence; and major revenue sources are controlled by potential taxpayers who, faced with high taxes in relation to services provided by the state, cannot credibly threaten to ‘exit’ by moving elsewhere or reducing their level of economic activity. If we focus more on the contemporary world, there is a close linkage between coercive taxation and under-resourced and under-regulated local government in poor agrarian environments.42 My second question is more action-oriented. Are we right to be concerned about the impact on the quality of governance of the dependence
41
42
There is still considerable debate about the causal processes underlying these toxic political outcomes of high natural resource rents. I believe that much of the story lies in the strong temptations for state elites controlling these resources to militarise, to buy off potential opponents and exclude most domestic actors from significant political influence because of rational fears that other actors will use force to obtain and then maintain control of the state, and thus access to the surpluses. There is also substantial coercion in the taxation of higher, urban and formal sector incomes in many poorer countries, especially perhaps in those countries where governments lack the motive or capacity to tax widely, and tax administrations focus on a relatively small number of large formal sector enterprises. In such contexts, the coercion is generally heavily intermixed with a high degree of corruption: the direct bribing of taxcollectors by taxpayers; and the corrupt lobbying of governments to reduce the burdens imposed on individual enterprises or economic sectors. Damaging as these practices are to governance, they do not violate decency and human rights to quite the same degree as non-uniformed militia men stopping buses in rural Uganda, demanding poll tax receipts and squeezing the throats of those poor people who cannot supply the right documents and do not rush to offer cash.
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of so many contemporary governments on rents – from natural resources or development aid – rather than on broad taxation? Were these rents not available, would we find more widely replicated in contemporary poor countries the beneficial consequences of revenue bargaining for the quality of governance that so many people have identified for historical Europe? A combination of historical and contemporary case material, deductive logic and contemporary cross-national and intranational statistical analysis43 suggests a positive answer to both questions and supports the contractualist notion that polities are significantly shaped by bargaining between states and societal groups around fiscal issues. The extent and character of that bargaining seems, however, to be influenced by a wide variety of structural features of economies and polities, as well as more contingent historical and political trajectories. Modern states are larger and more complex than those of early modern Europe, and modern economies also tend to be more internationalised and interconnected. Contemporary revenue bargaining is both more diverse and, in most cases, less overt than in seventeenth-century Britain.
43
Gervasoni (2006) has looked at the recent political history of Argentina’s Provinces, which depend substantially on transfers from central government and, in a few cases, local revenues from the oil extraction industry. He found that the Provinces most dependent on broad taxation of their citizens had historically been more democratic. Where Provincial governments were generously supplied with financial transfers from central government or oil revenues, local political leaders had been better able to buy off or suppress competition from democratic oppositions. Hoffman and Gibson (2006) have compared district governments in Tanzania, where local revenue raising is often quite coercive. Where district populations have the greatest potential economic mobility, and therefore the scope to flee from coercive local taxation, the district governments spend higher proportions of their revenues on providing services for their citizens, and less on themselves.
3
Capacity, consent and tax collection in post-communist states Gerald M. Easter
3.1
Introduction
This chapter investigates post-communist state-building through an examination of tax collection. I seek to explain divergences in outcomes between the post-communist states of East Central Europe (ECE) and those of the former Soviet Union (FSU). While post-communist states in each region begin from similar starting points, they end up on different developmental paths. Compared to the states of the former Soviet Union, the East Central European states exhibit more democratic decisionmaking, more progress in developing efficient administrative capacity and greater societal consent. Focusing on the revenue bargains that were forged in response to the fiscal and political crises that unfolded in the early transition period, I explain how political battles over the creation of new tax regimes contributed to these differing outcomes. These revenue bargains became an enduring influence on the development of capacity and consent in the post-communist states. The Polish and Russian experiences illustrate the contrasting paths of ECE and FSU countries to post-communist state-building. I distinguish three sequential processes in the construction of a new tax regime: the making of revenue bargains as part of the establishment of new tax regimes; the effects of these revenue bargains on capacity to collect tax; and, the eventual remaking of revenue bargains in order to carry out tax reform. I conclude with a brief discussion of the larger political implications of revenue bargains and tax collection for post-communist state-building. 3.2
Tax collection and post-communist state-building
In contrast to previous state-building experiences elsewhere, postcommunist states inherited from the old regime an abundance of power resources – coercive, economic and bureaucratic–legal – in relation to society. Post-communist state-building thus involves the redistribution of power resources between state and society and within the state 64
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itself.1 It is more a matter of state re-formation than it is state formation in the conventional sense.2 The process is marked by conflict as state and societal actors make competing claims on the power resources of the old regime. It leads ultimately to a reconfiguration of power resources in new institutional forms. Variations in state-building outcomes can be observed across the former communist realm, especially between ECE and the FSU.3 In ECE, post-communist states have evolved with greater checks on political power, internally through institutional checks and balances and externally through legal mechanisms that protect society from the state. By contrast, the post-communist states of the FSU have evolved with fewer constraints on political power. They are characterised by the rise of strong executives and weak legal mechanisms that make society more vulnerable to political predation. The significance of weakly checked strong executives as factors influencing the variant political trends between ECE and FSU states is stressed in Easter (1997: 184–211) and Taras (1997). In ECE, power resources of the old communist states have been tamed. Coercive resources have been depoliticised and subordinated to institutional checks, while economic resources have been transformed into legally protected private property. In the FSU, the post-communist state apparatuses still have generous access to coercive resources and use them in the service of politics. Some economic resources have been transformed into private property, but the most valued assets have instead been made into economic concessions, to which the state has not fully relinquished its claim. In sum, the ECE states have been more successful than the FSU states at building state capacity and societal consent. In the early 1990s, these differing trajectories of post-communist statebuilding were not so obvious. In the initial transition years, political power was still fluid and power resources had yet to be reconsolidated into new arrangements. The ECE and FSU country groupings evolved in different ways through incremental and contested processes. Tax collection was one of the arenas of conflict that contributed to their differing 1
2 3
This distinctive feature of post-communist state-building is highlighted in Colton and Homes (2006). By contrast, the west European and post-colonial state-building experiences featured weak state authorities trying to claim power resources from strong societal actors (see, respectively, Tilly 1975 and Migdal 1988). The ‘recombinant’ institutional character of post-communism is well described in regards to the economic transformation in Stark and Bruszt (1998). ECE represents Poland, Hungary, the Czech Republic and Slovakia. The FSU represents Russia, Ukraine, Belarus, Armenia, Georgia, Azerbaijan and the Central Asian states. Although part of the FSU, the post-communist Baltic states have evolved in a manner closer to the ECE states. Although part of the war-torn Balkans, Slovenia also resembles the ECE variant.
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patterns of institutional reformation. Communist societies were among the most heavily taxed in the world, but communist states did not have to haggle with autonomous economic actors over taxes. Instead, the state had direct access to the economic resources of the command economy, which were concentrated in large industrial complexes. The collapse of the command economy and emergence of a transition economy created fiscal crisis. The post-communist states were confronted by outstanding debts, rising budget deficits and declining revenue sources. To avert fiscal crisis, their leaders had to locate, claim and collect new sources of revenue. The creation of a new tax regime was one of the primary tasks of postcommunist state-building, but post-communist states were challenged by an inheritance of structural constraints. First, they were limited by a narrow revenue base. The command economy was designed so that central planners could easily access and redistribute revenue across an interconnected web of industrial complexes. The communist states were dependent for revenue on a small number of very large enterprises. This narrow revenue base posed a formidable constraint for post-communist state-builders, who were compelled to cultivate new sources of revenue from the transition economy. This challenge was compounded by underdeveloped administrative capabilities of the new states. The tax administration in the command economy had really been a bookkeeping appendage of central planning. Tax administrations were familiar with the economic activities of the large enterprises, but not much else. They needed time to develop the resources and expertise to monitor transactions and collect taxes from the transition economy. The creation of new tax regimes was also influenced by political constraints inherited from the breakdown of the communist regimes. The path of regime breakdown differed across the region. In ECE, social protest movements helped to bring counter-elites to power. They maintained an elite consensus on the basic direction of the transitions and were committed to breaking the state’s previous monopoly on power resources. They inherited a state apparatus that was still intact. In the FSU, two different paths of regime breakdown were taken. In the Slavic states, counter-elites and old regime elites shared power uneasily through the breakdown phase but split into competing factions in the transitions phase. Many old regime elites attempted to grab the valued power resource of the old regime and, in so doing, contributed to the fragmentation of the state apparatus. In the central Asian states, old regime elites came through the breakdown phase without serious challenge. After an initial period of institutional fluidity, the counter-elites in ECE constructed parliamentary or mixed systems, whereas the old regime elites in the FSU preferred strong presidential systems.
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These structural and political conditions varied from one postcommunist state to the next. They became constraints on the efforts of post-communist state-builders to establish new tax regimes. The new tax systems were borrowed from the advanced industrial market economies, but their tax systems had evolved incrementally, and often with sustained challenges, over a long period of time. They could not simply be imposed on the transition economies. The new revenue claims made by the postcommunist states provoked resistance that threatened political conflict and fiscal crisis. As a result, revenue bargains were struck between the postcommunist state and society. In the early transition, these bargains helped to bring about political peace and provided the state with access to revenue. They also helped to shape the process of post-communist state-building. This chapter compares the experiences of the post-communist Polish and Russian states in building new tax regimes. Poland and Russia are representative cases of the alternative ECE and FSU post-communist state-building paths. While they began the process from a similar starting point, variations in the revenue base and political circumstances led them into different revenue bargains. First, new state leaders in both countries inherited the unwieldy institutional structure of the command economy as well as a rapidly deteriorating system of state finances. Taking advantage of a window of opportunity briefly opened at the moment of regime transition, leaders were able to introduce radical economic policy reforms meant to facilitate an eruption of private economic activity. The Polish revenue base, however, lacked significant income-generating enterprises, although it did include an already established and growing private sector of small businesses. The Russian revenue base lacked a developed private small business sector, but it did contain very lucrative income sources in the energy, metallurgy and commodity export sectors. The politics of the early transition were quite different in each case. In Poland, the process of post-communist state-building was led by counter-elites, who succeeded to power on the strength of protest politics. They were determined to build the foundations of a democratic polity and a market-based economy, not least because of hopes of joining the European Union. Although conflicts occurred, the Polish transition benefited from an elite consensus on the general direction of political and economic change. Protest politics would remain a power resource in the early transition, when political institutions were still in flux. In Russia, by contrast, post-communist state-building took place amid a protracted and polarising intra-elite conflict over the direction of the transition. Moreover, Russia’s state apparatus was fragmented by the politics of regime breakdown as new and old elites seized the power resources of the communist state. Unlike in Poland, collective action and protest
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politics were not significant factors in regime breakdown. The defection of old regime elites played a major role. 3.3
The politics of revenue bargains and tax regimes in Poland
The first step in creating a new tax regime was to establish a tax code. The tax code embodied the new revenue claims of the post-communist state. It required building the administrative capability to locate and extract revenues. Several potential sources of revenue could be found in the transition economy: the old public sector of state-managed enterprises; the privatised sector of former state firms; the new private sector of mostly small and medium businesses; and households or individuals. These various economic entities had their own tax policy preferences. In both Poland and Russia, new tax codes were designed by young economists enthusiastic about market capitalism. For a brief moment, at the outset of the transition, they were insulated from political pressures. But the creation of a new tax code inevitably bestowed privileges on some and placed burdens on others. State finances quickly emerged as one of the main arenas of political conflict. As Poland and Russia tried to implement their new tax regimes, they met resistance from the actors from whom they sought revenue. The fiscal architects of the post-communist state had to balance the immediate need of averting financial collapse with the ultimate goal of expanding revenue bases. In both countries, the early transition was marred by political crises in which revenue extraction figured prominently. Compromises were made. In effect, Poland and Russia were forced to orchestrate revenue bargains in order to buy political peace and assure access to economic resources. The substance of the revenue bargains, however, was quite different between the two cases. In late 1989, Poland’s new Solidarity-led government enacted a series of radical reforms intended to dismantle the command economy and build the foundations for market capitalism. Finance Minister Leszek Balcerowicz was the chief architect of economic reform. An unwavering proponent of free markets, Balcerowicz sought to ‘shock’ the economy into capitalism through rapid and comprehensive structural reforms. This policy, however, threatened to exacerbate the already critical fiscal situation.4 The reforms aimed to destroy the state-managed industrial sector, the main source of tax income. Taking advantage of the political 4
The ‘fiscal traps’ for the post-communist states inherent in the programme of marketoriented economic reform is discussed in Kornai (1995).
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respite that accompanied gradual withdrawal from power of the communist regime, the new government introduced a set of emergency fiscal measures. Public spending was slashed, state investment was frozen, the currency was devalued, and foreign debt relief was secured. But this was not enough: a new tax regime would also be needed to offset the anticipated decline in revenue from state enterprises. In the first year of economic transition, state revenues dropped by nearly 25 per cent and the budget deficit nearly doubled.5 A new tax code was legislated piecemeal: Corporate Income Tax (CIT) in 1988, Personal Income Tax (PIT) in 1991 and Value Added Tax (VAT) in 1993. The basic design of the new tax code was borrowed from western Europe, where tax systems had evolved over centuries. Even with the new tax code, the revenue base inherited from the old regime did not offer easily exploitable income sources. The fiscal architects of postcommunist Poland were challenged to uncover new sources of revenue. This task was further complicated by the weak capabilities of the tax administration. It lacked good mechanisms to monitor household incomes or track transactions in the emerging private sector. The new tax regime was designed to encourage the economic activities of entrepreneurs and shift the tax burden to the households of public sector workers. The government sought to cultivate a private sector that would eventually provide an expanded source of revenue. This entailed offering tax incentives to entrepreneurs to create small and medium-sized enterprises (SMEs).6 Start-up SMEs were exempted from paying corporate income taxes for a transitional phase. The strategy also included punitive taxes on public enterprises. In particular, public sector workers were subjected to an excess wage tax, applied to state enterprises whose payrolls exceeded the ceilings decreed by government. Assessed at a prohibitive rate of 500 per cent, the excess wage tax was meant to keep inflationary pressures in check and to hasten the movement of public employees into the private sector (Tait and Erbas 1997). By 1992, 3.5 million new jobs were created in the private sector. However, the new tax regime stirred up trouble among the millions of workers who remained in the state sector. Unlike the emerging private sector, state enterprises were already well known to the tax administration. The excess wage tax was readily applied and soon became an important source of income. In 1991, the excess wage tax accounted for 5 6
Rosati (1998: 146, Table 4.1). The budget deficit was 3.8 per cent of GDP in 1991 and 6 per cent of GDP in 1992. Three types of SMEs based on the size of the work staff were recognised: micro, with 1–10 employees; small, with 11–49 employees; and medium, with 50–249 employees.
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more than 20 per cent of government revenue (Easter 2002: 619, Table 3). But the wage tax was seen as unfair. It was deeply resented by public sector employees, who mobilised to resist it. They engaged in protest politics against the government’s economic policies in general, and the excess wage tax in particular. In the absence of operational accountability mechanisms, public sector workers revived the power resource of collective action to register their grievances. They staged rallies, filed petitions and went on strike. The country’s largest trade union organised a nationwide campaign against the excess wage tax (Ekiert and Kubik 2001: 118; Slay 1994: 157, 158). The return of protest politics threatened to destabilise Poland’s fragile democratic transition. The government’s ambitious pro-market economic reforms split the Solidarity movement into Right and Left political blocs. The 1990 presidential election brought to office Lech Walesa, the former trade union champion who was now critical of the pro-market government. In the 1991 parliamentary elections, the splintering of the Communist Party as well as the opposition movement resulted in a politically fragmented legislature. A struggle broke out between the president and Parliament over the institutional division of power, but this conflict was soon resolved through negotiation as Poland’s political elites demonstrated the capability to reach consensus over the parameters of the political transition. In 1992, the ‘Little Constitution’ created a mixed system in which Parliament controlled the government, with defined checking powers for the president. Finally, in the 1993 parliamentary elections, a social-democratic coalition came to power. The new left-leaning government faced the challenge of creating a fiscally and politically viable tax regime. It had openly opposed the excess wage tax during the election campaign. Now in charge, the social democrats wanted to act quickly to redress worker discontent over discriminatory taxes but were constrained by fiscal necessity to maintain the new state’s revenue claim on household income. The result was the forging of a revenue bargain between state and labour. This bargain succeeded in defusing the protest politics of workers, while legitimating a new revenue claim. The post-communist tax regime designed to facilitate the rapid growth of private enterprise was revised. Most notably, the excess wage tax was phased out. From 1993, state firms that were profitable were allowed to negotiate exemptions from the excess wage tax. The penalty on state firms that exceeded the wage ceiling was lowered from 500 to 300 per cent. In addition, a process for negotiating the repayment of assessed penalties was established for those firms that raised wages beyond the established norms, despite operating at a loss. At the beginning of 1995, the excess wage tax was officially abandoned and most outstanding debts
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were forgiven (OECD 1994: 63, 64). But a substitute source of revenue was needed. The revenue bargain enabled the state to access household incomes through a new Personal Income Tax (PIT) and a Social Security Tax. The PIT was especially noteworthy since household income had not previously been a significant revenue source. The PIT was introduced in the midst of Poland’s early political crisis, going into effect in 1992. It soon became the means by which the state successfully expanded its revenue base. In its first year the PIT provided 20 per cent of total government revenue, and thus proved to be an adequate replacement for the excess wage tax. In the next year, 1993, the PIT accounted for nearly 25 per cent of revenue. The government eased the burden on households by indexing workers’ wages both for inflation and for the anticipated salary loss caused by the new tax. Besides the PIT, the new government increased social security contributions from individual taxpayers. Political constraints and fiscal necessity shaped the revenue bargain that evolved between the state and labour in the early 1990s. The fiscal predicament of the post-communist state demanded an expansion of the revenue base. Even the social-democratic government recognised the need to tap into workers’ incomes. State enterprises were already known to the weak tax administration, which used public-sector employers to gain access to the personal income of workers. But the state’s initial attempt to impose a tax burden on public-sector workers was resisted in collective protest. The revenue bargain had to offer something tangible to workers in exchange for their compliance. The strategy of the social-democratic government was to redistribute the tax burden, invite labour into the policy process and guarantee a basic level of social welfare. In so doing, the state gained access to household income and secured political peace, while workers in the state sector were afforded protection from the emerging market economy. The process of privatising state enterprises was delayed.7 Fiscal measures that penalised the public sector were eliminated. Under a new Finance Minister, Grzegorz Kolodko, the social democratic government subsidised the public sector, instead of starving it (Kolodko 2000: 213, 214). The public sector trade unions began to engage in ad hoc bargaining with the government over wage and tax policy. This bargaining process was formalised in 1994 with the creation of a Tri-Partite Commission that included the government, management and labour. The new tax regime, 7
OECD (2001: 80–3, 90). In 1992, public sector employment accounted for 42 per cent of the workforce; in 1996, the number was down to only 38 per cent. The privatisation process picked up pace again in the later 1990s.
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however, embodied an inherent tension between the economic interests of private entrepreneurs and the employees of state enterprises. 3.4
The politics of revenue bargains and tax regimes in Russia
The fiscal architects of the post-communist Russian state also found themselves confronted with a financial crisis, though not quite as dire as in Poland. In December 1991, the Soviet state expired amid rising budget deficits, spiralling inflation and declining tax revenues. At this point, the government launched a programme of radical economic reform, modelled after Poland’s, including a new tax code. The main features were VAT, to replace the old turnover tax on enterprises; PIT on households; an unreformed profits tax on enterprises; and new excise taxes on the business sector, especially on energy exports. The new tax code was designed to collect revenue from a transition economy. However, the new state did not have the capabilities to put it into effect. Compared with Poland’s, the new Russian tax administration was even less competent to monitor the emerging private sector. The Russian tax administration was created on a bureaucratic whim, in late 1991, through a declaration that the revenue offices of the old Soviet Finance Ministry henceforth constituted a tax collection agency. Decentralised in command, deficient in resources and devoid of skill, the staff of these offices were not ready for the assignment. Their charge had long been the financial affairs of the industrial giants of the command economy. Now, with the stroke of a pen, they were mandated to locate income, monitor transactions and collect revenue in the emerging nonstate sector. In 1992, fiscal crisis loomed. The revenue of the central state, measured as a percentage of GDP, declined by a third. In response, the state tapped into the most familiar and reliable income source – the large exporters in the energy sector. The new tax code placed the heaviest tax burden on these corporations. In 1989, turnover tax and profits tax accounted for 64 per cent of total revenue; in 1993, after the first year of radical reform, VAT and profits tax accounted for more than 60 per cent of total revenue (Nagy 1997: 235). In essence, nothing much had changed. As in Poland, the new tax regime was grafted onto revenue sources that were already known to the tax administration. But it also made the Russian state dependent for revenue on a select group of large corporations and rich regions, which resisted these claims. In turn, the state was compelled to make revenue bargains with the post-communist business and regional elites.
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The political and economic circumstances that shaped revenue bargaining in Russia were distinctly different from those in Poland. Russia’s transition did not benefit from elite consensus over the basic institutional design and policy direction of the transition. From the summer of 1992, Russia was in the throes of political crisis, marked by ideological polarisation and institutional stalemate. In the autumn of 1993, President Boris Yeltsin forcibly closed Parliament and imposed a new constitution, concentrating coercive and economic power resources in the executive. Decision-making on the executive side was not concentrated, but dispersed among the presidential administration, governmental ministries and agencies, and various commissions. Multiple access points created opportunities for special interests to penetrate the policy process to strike individual bargains.8 While the new constitution settled the institutional power struggle, it did not reconcile the still divided political elite. Elite conflict, now waged according to the boundaries of the constitution, continued throughout Yeltsin’s tenure. The left-controlled Parliament acted not as a loyal opposition, but as an anti-system adversary, intent on bringing down the president. As a result, Yeltsin built alliances with regional and economic elites, in part through the generous distribution of economic concessions. With notable exceptions, he displayed reluctance to employ coercion. Instead, Yeltsin preferred to engage challengers in processes of bargaining which led the central state to cede its claims on particular resources. This bargaining process resulted in the rise of powerful regional and economic elite actors. Under Yeltsin, the Russian state resembled a medieval mosaic of competing political and economic fiefdoms. These political constraints shaped the strategy of the post-communist state for revenue extraction: elite bargaining. Economic and regional elites succeeded in securing concessions on tax rates and other privileges for their particular concern. Lobbying was conducted mostly on a personal basis. Tax privileges were negotiated discretely with particular state agents, often without the consent of other state agencies involved in the tax policy process. Elite bargaining was facilitated by the numerous access points to the policy process in the new state. While the government was responsible for submitting budgets and drafting tax legislation, the legislature was assigned the formal power to approve budgets and tax policies as well as the right to introduce its own initiatives regarding state finances. Regional governments, meanwhile, sought to consolidate their own 8
In his memoirs, Yeltsin (2000: 215, 216) mentioned how economic and tax policy was affected by ‘multiple centers of power’ during his first administration.
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claims over local revenue sources. Elite bargaining produced a tangled web of special favours that ultimately undermined the efforts of the state to build the capacity to extract sufficient revenues. The strategy of elite bargaining had a direct impact on the tax regime. It was likened to a ‘Swiss cheese’ tax system, since it was so full of holes (Tanzi 2001: 56). As a result of multiple access points to the policy process, the tax system grew increasingly convoluted and complex through incremental and piecemeal revisions. By 1997, the tax code consisted of nearly 200 different taxes, augmented by 1,200 presidential decrees and government orders, 3,000 legislative acts and 4,000 regulatory acts and instructions from ministries and agencies. In addition, regional governments added more than a hundred of their own additional taxes to the system (Tolkushkin 2001: 312, 313; St Petersburg Times 2–8 March 1997). On paper, the new tax systems in Poland and Russia appeared similar; in practice, they were fundamentally different. Lacking a rich source of income to exploit, Poland’s new tax regime was designed to break out of the inherited structural constraint of a narrow revenue base by promoting the growth of a private business sector and by tapping into the income of households. The new tax code offered incentives to private entrepreneurs and sanctions for public enterprises. This entrepreneurial-based revenue strategy provoked a revival of worker-led protests. With a change of government, this initial revenue bargain was compromised to accommodate the demands of labour. As a result of the ensuing revenue bargain, the Polish state was able to expand its revenue base with the introduction of a PIT levied on worker households. In Russia, meanwhile, the state did not attempt to expand the revenue base by cultivating the nascent private sector. Instead, blessed with natural resources highly valued in world markets, the Russian state targeted large enterprises in the energy sector. This brought the state into conflict with business and regional elites, who also claimed these prized assets from the old command economy. For reasons of political expediency and administrative weakness, the state made revenue bargains with these elite actors. The regime was therefore dependent on their cooperation. 3.5
State capacity, societal consent and tax collection
Communist states did not require a compliance strategy to collect taxes. Instead they extracted hidden taxes indirectly through the administrative structures of the command economy. Post-communist states have brought the tax burden out of the shadows and placed the obligation to pay directly on the taxpayers. Plagued by weak administrative capabilities, states must cultivate societal compliance for new revenue claims.
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In general, tax compliance is related to three conditions: exchange for public goods, costs of complying or evading and contingent consent of taxpayers (Slemrod 1992; Weberley 1991). When these conditions are favourable, it is more likely that taxpayers will comply. Poland and Russia devised very different compliance strategies. These in turn directly affected the development of state capacity and societal consent. The test for their new tax regimes came in 1998, when a worldwide financial crisis of emerging markets reached eastern Europe. The revenue bargain that underlay Poland’s tax regime enabled the new state to survive this fiscal challenge; in Russia, however, the 1998 financial crisis exposed the weaknesses of the elite revenue bargain. In Poland, the revenue bargain negotiated between the state and labour helped to foster the conditions that contribute to increased tax compliance. The Polish state succeeded in making a new revenue claim on personal income and in expanding its revenue base. Tax compliance in Poland was enhanced, in particular, by the exchange of tax payments for services and by relatively high levels of contingent consent. First, Polish taxpayers benefited from the continued delivery of public goods and services into the post-communist era. This was not the case at first when the pro-market government enacted budgetary cuts that eliminated state sector jobs and cut social subsidies. The tax regime established by the first pro-market government provoked widespread protest and non-compliance. But the social-democratic government reversed these policies and Polish workers began to receive goods and services in exchange for tax payments. The social-democratic government stopped trying to force public workers into the private sector and invested in state enterprises instead. The public sector continued to provide a viable means of survival for a substantial labour force. The wages of publicsector employees were paid on time and indexed to keep up with inflation. By the late 1990s, average public sector wages exceeded private sector wages (OECD 2002: 33, 34). The government also continued to provide generous social subsidies to retired, unemployed or disabled workers. Retirement and disability pensions were indexed to keep pace with inflation. In fact, retirees received 67 per cent of their salary in 1998, compared to only 53 per cent in 1989. The number of pensioners increased from 7 million in 1990 to 9.5 million in 1998 (Lenain and Bartoszuk 2000: 3). These generous benefits were provided from a social insurance fund which was separate from the general budget and financed by the social security payments of individual taxpayers. More generally, the post-communist state was able to maintain public services, such as transportation, health and education, without any dramatic or prolonged disruption.
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Second, tax compliance was sustained by the contingent consent of those from whom revenue was sought. When the pro-market government attempted to apply a discriminatory tax on public-sector workers, it was widely evaded and stirred up resistance and protests. But this was not the case with the PIT. The excess wage tax was viewed as an unfair burden because it targeted a specific group within society and was not applied uniformly. The Constitutional Tribunal later agreed with this view and ordered the payment of salary arrears (OECD 1998: 55). In a short period, the excess wage tax contributed to a sharp rise in income disparity between private- and public-sector households. The PIT, by contrast, was applied evenly across the economy and did not generate similar indignation or protest. The termination of the excess wage tax led to rises in productivity in the public sector and a more even distribution of income between the private and public sectors (Kolodko 2000: 156–9). Public sector workers viewed the PIT as a more legitimate revenue claim. Of course, the PIT and social security were deducted by employers. This reduced the responsibility of individual workers to report their income. However, these same employers had been equally obligated to pay the excess wage tax, and had widely failed to do so. Finally, the government sought to reduce the burden of tax compliance. Public sector workers received raises and their salaries were indexed. Although the PIT rates reached as high as 40 per cent, only 1 per cent of taxpayers qualified for this rate. Most taxpayers fell into the lowest bracket, which was reduced further by personal exemptions targeted on households. Tax avoidance and evasion were notably higher in higher-income brackets. The government did not put much emphasis on coercion, meaning that the risks incurred by taxpayers for evasion were not very high. In Russia the conditions that fostered compliance were not as favourable as those in Poland. The Russian state did not offer a sufficient exchange for tax payments, the tax burden was distributed unevenly and the costs of compliance were high. First, the state drastically curtailed the delivery of public services and goods, which had long been a major component of household welfare. The decline in public health, for example, was noteworthy and alarming, as new and old diseases spread and average life expectancy declined. In addition, in the mid 1990s, as budget revenues dwindled, public-sector employees were repeatedly paid their wages late or not at all. In the mid 1990s, the public sector was riddled by strikes and slowdowns by unpaid workers. Even employees of the tax administration went on strike over unpaid wages. Second, contingent consent was lacking. The widespread perception among taxpayers was that others were not paying taxes and were not
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being caught. Frequent reports in the press and statements of government officials on widespread tax evasion confirmed this notion. Unaccustomed to paying taxes, individuals under-reported their incomes with the complicity of their employers. The competition among state actors to claim revenue from the same sources undermined any sense of fairness in the tax system. Non-compliance quickly became the norm throughout society (Perov 2000: 157). Last, the costs of compliance also ran high. Even if new small and medium businesses wanted to comply with their tax obligations, to do so often meant financial ruin as federal, regional and local governments all claimed a share of the same income. Reporting income ran the risk of endless scrutiny by tax administrators. The general uncertainty about tax rates and competing revenue claims led many corporations and regions to withhold their tax payments to the central government. In addition, the low capacity of the tax administration to monitor and enforce lowered the threat of detection and punishment. The tax administration had only a distorted and incomplete picture of the income of small businesses and households. Large corporations successfully concealed income by setting up a network of territorially dispersed ‘shell’ companies that the decentralised tax administration could not effectively monitor (Aitken 2001). Moreover, in the early and mid 1990s, the state proved incapable of making good on its threats to use coercion against tax evaders. Highprofile attempts to seize assets from the largest tax delinquents ended with the state’s revenue agents backing down.9 Lacking effective means of enforcement, the revenue claims of the new state went unheeded. Comparative macro-level indicators show that Poland was more successful in developing capacity and consent for its new tax regime. This is not to suggest that Poland was immune from tax evasion and avoidance, but rather that its early results were successful relative to other postcommunist states. In Russia, tax evasion rose sharply through the 1990s. Unreported income, avoidance schemes and payments in kind rather than cash became the norm. Poland was much more successful in encouraging individuals to file personal income tax statements. In 1992, PIT was put into effect for a workforce of 17 million. The state received 10 million tax returns for the first year, while the number grew to 16 million by 1996. PIT became a principal source of state income. In Russia, in contrast, PIT was applied to a workforce of 70 million individual taxpayers. But it was not until 9
In late 1996, the president created a special commission empowered to use coercion to collect back taxes from the largest debtors. After a losing showdown with energy giant, Gazprom, the commission quietly disbanded. It produced no convictions.
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2000 that the tax administration was able to collect 10 million income tax statements (Easter 2002: 620). PIT did not become a significant source of revenue for the Russian state. Another indicator of non-compliance is the amount of tax arrears that individuals and businesses owed to the state. The excess wage tax in Poland was seen as illegitimate and was widely evaded by public sector firms. This quickly became the tax with the highest level of arrears (OECD 1994: 68, Table 11). These debts were eventually wiped clean as part of the revenue bargain between the state and labour. The large state industrial enterprises, particularly in the coal sector, continued to run up tax arrears. By 1998, the total amount of tax arrears was equal to roughly 3 per cent of GDP (Lenain and Bartoszuk 2000: 7; OECD 1998: 40). Russia, meanwhile, experienced a sharp rise in tax arrears from the state’s primary income source, the large corporations. The hundred largest tax debtors accounted for 40 per cent of all federal tax arrears (Russian Economic Trends 1997). The large energy firms topped the list of tax delinquents. In 1996, unpaid taxes topped US$20 billion, or 5 per cent of GDP; while only three of eighty-nine regions fulfilled their revenue obligations to the centre (Koshkin 1997: 33–5; Tikhomirov 2000: 66). The size of the unofficial economy can also serve as an indicator for tax compliance. The ‘shadow’ economy conceals a significant amount of economic activity from the state in all the transition economies. It is in particular a refuge for small private businesses seeking to hide income from the state. In Poland, the shadow economy is estimated to constitute as much as 20 per cent of GDP. But in Russia, estimates of the unofficial economy tend to fall in the range of 40–60 per cent of GDP (Johnson, Kaufmann and Zoido-Lobaton 1998: 387–432). The capacity to collect revenue was also adversely affected by tax exemptions and special deals that were part of the revenue bargains. If the Russian tax regime could be likened to a Swiss cheese, the Polish one featured sacred cows. In Poland, privileged state industrial enterprises ran up large tax debts, which were routinely cancelled by the social democratic government. Two former Solidarity strongholds – the Ursus tractor factory and the Gdansk shipyard – were more than once given special treatment over their corporate tax debts and social security obligations (OECD 1998: 57–9). Special exemptions, including generous deductions for housing and education costs, also lowered the state’s take from PIT. Tax administration officials estimated that almost 20 per cent of the potential revenue from PIT was lost in this way (Lenain and Bartoszuk 2000: 8). Whereas in 1993 tax exemptions were calculated to be roughly 1 per cent of GDP, by 1998 the figure had risen to 8 per cent.
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In the second half of the 1990s, more than 40 per cent of state business aid came in the form of tax concessions (OECD 2002: 70). While these corporate and personal tax exemptions reduced tax collection receipts and created imbalances in the tax base, they did not undermine the flow of revenue sufficiently to force the state into fiscal crisis. The Russian state was dependent on the large corporations and rich regions for income. But the special deals that characterised the elite bargaining revenue strategy became its undoing. At a time when the state desperately needed income, the numerous manipulations of tax policy had negative cumulative effects on revenue extraction. According to the Ministry of Finance, in 1995 tax exemptions cost the budget roughly US$6 billion in revenue. By 1996, the cost of tax exemptions was estimated to have grown to US$30 billion (Kommersant 20–21 February 1997). The amount of revenue lost through tax privileges was close to one-third of the total taxes collected for the consolidated budget, and more than two-thirds of the total taxes collected for the federal budget (Finansy v Rossii 2000: 24). The real test for the revenue bargains of the Polish and Russian states came with the international financial crisis of emerging markets in 1998. The collapse of East Asian financial and currency markets signalled that the recent investment boom was over for the high-growth, but high-risk, emerging market economies (Kahler 1998). The transition economies of eastern Europe were jolted by the sudden declines in foreign capital and credit. The ‘Czech Miracle’, for example, quickly dissolved into a currency crisis that exposed the fiscal weaknesses of its post-communist state. The Polish tax regime, supported by the state–labour revenue bargain, provided secure fiscal foundation for the new state. The revenue base was successfully expanded to include household income. Personal Income Tax accounted for more than a quarter of total revenues collected throughout the mid 1990s. Corporate Income Tax, on which the communist state had been dependent, was gradually reduced from 28 per cent of total revenue in 1991 to 11 per cent in 1997. The new entrepreneurial private sector became the driving force in the recovery of the Polish economy. By mid-decade, small and medium businesses were making a significant contribution to the state budget. The budget deficit came down from 6 per cent to 3 per cent of GDP. Polish households even bought government bonds to finance the deficit, while the cost of debt service to the budget steadily dropped (OECD 2004: 84). By 1998, the Polish state was taking 41 per cent of GDP in taxes and social security payments. Poland not only survived the 1998 financial crisis but also recorded its third straight year of positive economic growth. Unlike other
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emerging market economies, it did not experience a flight of foreign investment (Warsaw Voice Yearbook 1998: 22, 23). Despite its dismal tax collections, the Russian state had been able to survive financially on its take from oil exports and from short-term credit. In 1998, oil and gas prices plummeted in world markets, reaching a twenty-year low, and depriving the state of its principal source of revenue. The state was now increasingly subsisting on short-term credits. However, with capital in short supply, the borrowing costs were becoming prohibitive. Paying the interest consumed what little revenue came in. The Russian state was caught in a fiscal trap. In the spring of 1998, a new government was installed to find a way out of this looming crisis. Its lastditch efforts to reform the tax code, coerce the large corporate tax debtors and negotiate new terms from its creditors all failed. In August 1998, the state was in fiscal collapse. The debilitating effects of the state–elite revenue bargain on state capacity were laid bare. 3.6
Remaking revenue bargains
By the late 1990s, both Russia and Poland recognised the need to reform their tax regimes again. The Russian state was bankrupt. While Poland survived that particular threat, the flaws in its tax regime were becoming clearer. The tensions between entrepreneurs and labour could no longer be balanced. In both cases, the revenue bargains of the early transition became obstacles to tax reform and the prospects for economic growth were jeopardised. Undoing these politically entrenched revenue bargains was not easy. In the end, the Russian and Polish states both succeeded in altering the original revenue bargains and enacting tax reform. The differences in the methods used illustrate how dissimilar the two states had become. In Poland, tax reform was enacted consensually and gradually. In Russia, it was unilateral and radical. 3.6.1
Poland
Poland averted the 1998 international financial crisis, in part because of its revenue bargain, which enabled the state to expand its revenue base and provide a steady source of income. But this bargain contained a tension between the economic interests of entrepreneurs and workers. To maintain its provision of public goods and subsidise state enterprises required more revenue than was available. The government ran modest deficits to cover its extensive budgetary commitments. In the 1990s, the costs of an exchange-based compliance strategy were increasingly shifted to small and medium private businesses. The creeping tax burden
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adversely affected the economic activities of entrepreneurs, as productivity declined and non-compliance increased. The politically privileged state enterprises, meanwhile, still managed to receive special tax exemptions. The increasing complexity and unevenness of the tax system generated calls for reform. The 1997 parliamentary elections brought into office a coalition government and forced the social democrats into opposition. The coalition was an uneasy alliance of socially conservative trade unionists and free market liberals. The situation was further complicated by the presence of a social democrat president. The former pro-market finance minister, Leszek Balcerowicz, was named a deputy prime minister and once again was put in charge of state finances. Balcerowicz proposed a reform package aimed at promoting private sector growth, eliminating public sector profligacy, balancing the budget and speeding up the stalled privatisation process. He was especially concerned to amend the state–labour revenue bargain to the advantage of private entrepreneurs and to lower the tax burden on the economy as a whole. The new government promoted an ‘Entrepreneurs Constitution’, which promised to put the private sector on equal financial footing with the public sector (OECD 2001: 107). The endeavour had some initial success. The finance ministry stopped offering easy credit and tax exemptions to unprofitable state enterprises. Balcerowicz also reformed the provision of healthcare by removing it from the central state budget, limiting its funding and devolving its administration to the local level (OECD 2001: 93–114). But Balcerowicz failed in an effort to enact a comprehensive tax reform. In 1998, he proposed to reform PIT radically, with a flat rate and the elimination of almost all exemptions, to lower the costs of compliance and to simplify tax administration. He also intended to eliminate existing VAT exemptions for a number of basic goods. The reform directly challenged the existing revenue bargain with labour. It was immediately assailed for being ‘anti-family’ (Warsaw Voice Yearbook 1998). The proposal split the coalition and failed in Parliament. In 1999, Balcerowicz tried again with a more moderate tax reform that would gradually lower rates for PIT and CIT and maintain their progressive character. With Balcerowicz threatening to resign, the coalition held together. But the reform was threatened by the veto of President Alexander Kwasniewski, who criticised the government for violating norms of social justice (Warsaw Voice 5 December 1999). After further watering down of the proposal, the president consented to a partial tax reform in which the CIT would be lowered from 34 per cent to 22 per cent over five years, while tax administration for small businesses was simplified. In addition, some small businesses were exempted from the
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VAT. Reform of the politically sensitive PIT, however, was postponed (OECD 2001: 107). Poland had finally begun to enact tax reform, with more radical measures still to come. Soon a force more formidable than the combative Balcerowicz emerged to threaten the state–labour revenue bargain. Poland’s political elites were united in their desire to join the European Union, but acceptance required that the government meet a series of fiscal conditions. In 2000, a European Union progress report on Poland’s readiness for admission stated that ‘substantial improvement’ was necessary in the area of tax policy and administration. In particular, the European Union demanded reforms in VAT and excise taxes, and evidence of administrative capacity to monitor transactions. The European Union has only a limited mandate over direct taxes, so PIT and CIT were not targeted for major revision. Tax exemptions for state industry and agriculture, however, were cited as a potential obstacle to admission (Kosc 2000). In response, Poland’s post-communist elite again exhibited consensus. President Kwasniewski joined with the coalition government to make fiscal reform a priority. Working together, the political parties began to sort out the details of a tax reform that would meet the European Union conditions as well as preserve as much as possible of the revenue bargain. With economic growth stalled, unemployment rising and budget deficits deepening, the coalition government finally fractured in the summer of 2000. Parliamentary elections in 2001 brought the social democrats back to power, and Kolodko was reappointed as finance minister in 2002. Even Kolodko now endorsed a tax reform that would bring a moderate revision of the labour–state revenue bargain (Warsaw Voice 7 March 2003). But economic conditions worsened. As the budget deficit reached more than 5 per cent of GDP, its highest level since the fiscal crisis of the early transition, reconsideration of the bargain was becoming inevitable. The existing political blocs went through a splintering of parties and reshuffling of individuals. In 2004, a new liberal party, the Civic Platform, emerged as part of a right–centre coalition government, with the pro-market Miroslaw Gronicki acting as finance minister. In the spring of 2005, Gronicki proposed a radical tax reform, including an across-the-board flat tax of 18 per cent for PIT, CIT and VAT. Full implementation, however, was put off until the 2008 budget. In part, this radical proposal was an effort to jump-start economic growth and, in part, it was a response to the tax-cutting measures of Poland’s east European neighbours. While this tax reform would fundamentally redefine the state–labour revenue bargain, it remained to be seen whether the government could pass the proposal or the coalition would come apart (Warsaw
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Business Journal 22 July 2005). Meanwhile, the enduring strength of the labour revenue bargain seemed to be reaffirmed by the head of fiscal administration, who assured that ‘the pro-social character of the Polish tax system will be maintained’ (Ciesielski 2004: 5). 3.6.2
Russia
In Russia, tax reform had been placed at the top of the government’s policy agenda in 1997. A tax reform package put forth at that time was intended to simplify the tax code by reducing the number of taxes from 200 to 30, lower rates in order to create an economic incentive for businesses to come out of the shadow economy, shift the burden away from the largest corporations, broaden the tax base and eliminate special tax exemptions.10 Tax policy was one area in which the president could not govern by decree but needed the consent of the legislature. Corporate and regional elites, who benefited from the existing tax regime, used the legislature to block the government’s reform efforts. When tax reform was finally taken up by the legislature during the autumn of 1997, over 4,000 amendments had been attached to the government’s proposal, effectively killing the initiative. The elite revenue bargain had become a political constraint on the policy process. The presidential succession from Yeltsin to Vladimir Putin created the opportunity to redefine this constraint. Most important, the political stalemate between the president and the left-wingdominated legislature came to an end with the departure of the polarising figure of Yeltsin. Pragmatic and patriotic, Putin’s leadership style differed notably from his predecessor’s. Putin was less inhibited by the political alliances that Yeltsin had built during his tumultuous reign. Instead, he displayed a readiness to employ the powers inherent in the president’s office, in particular, coercion. The political constraints on tax policy were transformed. Putin established a supportive bloc in the legislature, marginalising the left opposition. His government succeeded in breaking the executive–legislative stalemate over tax reform. Also, Putin reduced the number of players involved in tax policy through institutional reform and political manoeuvring. He streamlined the policy process and limited the access points for special interests to influence the tax regime. In cooperation with the legislature, he instituted a constitutional reform that greatly reduced the role of regional governors in the policy process and enabled the president 10
Nezavisimaia Gazeta 23 October 1996; Rossiiskaia Gazeta 17 July 1997; St Petersburg Times 21–27 April 1997.
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to intimidate the more independent-minded regional governors by threatening their removal. Putin demonstrated a willingness to unleash the coercive forces of the state against the corporate elites. Early in his tenure, criminal cases were brought against the most ambitious tycoons, forcing them to flee the country.11 Later, he used the police and tax administration to incarcerate the head of the Yukos Oil Company and seize its assets. The Yukos case, in particular, represented a highly visible and effective display of coercion by the central state against the corporate elite. These institutional reforms and coercive acts undermined the bargaining strength of the regional and corporate elites. The state’s revenue-bargaining strategy with the elites was reconstructed. Instead of an idiosyncratic and personalistic negotiating process, Putin sought to routinise the participation of elites in shaping tax policy. Corporate interests were not removed, but channelled into collective forums that now met regularly with the president and government. Bargaining between state and business over tax policy still occurred, but the state now dictated the terms. The result was comprehensive tax reform. In 2000, the government successfully enacted a ‘Russian Tax Revolution’.12 The reform package reduced tax rates, eliminated many tax privileges and simplified the tax code. In addition, it lowered the costs of compliance for taxpayers and eased the work of tax inspectors. A 13 per cent flat-rate personal income tax was introduced. The profit tax on corporations was reduced from 35 per cent to 25 per cent, while many profit tax exemptions were eliminated. A single social security tax consolidated five different previous taxes. In place of three different taxes, which had previously been administered separately and differently by central ministries and regional governments, a single raw mineral resource tax with an unambiguous rate was established (Rossiiskaia Gazeta 17 October 2001). Reforming the VAT was more complicated. The rate was finally lowered from 20 per cent to 18 per cent in 2003, but the Ministry of Finance has been reluctant to lower it further because of concerns about revenue loss. This tax revolution strengthened the state’s extractive capacity. Having demonstrated its coercive capabilities, the Russian state is now trying to utilise positive incentives to reduce tax evasion and raise tax compliance in society. The introduction of tax reform coincided with a surge in tax
11
12
Boris Berezovsky, business tycoon and the former head of the Security Council under Yeltsin, took up residence in London, while the head of the independent media corporation, Boris Gusinsky, fled to Spain. For an overview of the process of tax reform, including the working groups, see Iutkin (2002: 529–41).
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receipts. The energy sector has been especially profitable with the price of crude oil rising from the 1999 low of US$10 per barrel to over US$30 per barrel in 2001. While overall conditions have been favourable for economic growth under Putin, tax reform helped to facilitate the rise in tax revenues. The implementation of the flat tax Personal Income Tax, for example, has coincided with a rise in reported personal income. Ivanova, Keen and Klemm (2005) note the strong correlation between the introduction of the flat tax PIT and an increase in PIT tax receipts, but are more cautious about concluding that the increase is strictly a consequence of the reform. Since the enactment of these reforms, the total tax burden in Russia as a percentage of GDP dropped from nearly 35 per cent to 31 per cent. Yet in 2004, the state budget registered its fifth consecutive year in surplus. Tax reform also enhanced the extractive capacity of the central state in relation to the regions. The federal government claimed a larger take from central–regional revenue sharing. In 2001, the central state received 98 per cent of its revenue from the four most lucrative and easiest to collect taxes: 42 per cent from VAT; 22 per cent from excise taxes; 18 per cent from profit taxes; and 16 per cent from user fees on raw materials (Argumenty i fakty 12 June 2002). Despite successes, the reforms have not succeeded in one key area. The Russian state continues to depend heavily on income from a select group of big businesses. According to the tax administration, the twenty largest corporate taxpayers accounted for more than one-third of all the revenue received in the consolidated budget (Vedomosti 1 February 2001). In particular, the tax reforms have not yet significantly shifted the tax burden away from the fuel and energy sector (ITE 2001: 61).13 But while the state may be dependent on large corporations for tax revenue, Russia’s corporate elite remains dependent on state patronage for wealth and status. Russia’s corporate elite was created by the state and has not yet been able to secure outright autonomy. The Putin presidency reinforced this dependency. 3.7
Capacity, consent and post-communist state-building: conclusions
Poland and Russia serve as representative cases of the alternative paths of post-communist state-building seen in East Central Europe and the 13
In 2003, when VAT was finally reduced from 20 per cent to 18 per cent, the government compensated for lost revenue by raising excise taxes on oil and gas production and increasing the export tax on gas from 5 per cent to 30 per cent (Moscow Times 23 June 2003).
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former Soviet Union. I have argued that the battles and bargains over the creation of new tax regimes contributed to these variant state-building outcomes. This is not to argue that conflicts over new revenue claims were the only influence on the shaping of post-communist states. Other factors related to history, geography and society also contributed. I do not take the naive view that, for example, if only Russia had tried harder to establish a personal income tax, then it would be a consolidated democracy today. Nor do I accept that these alternative state-building paths were predetermined. The processes were shaped by a series of political conflicts that went back to the breakdown of the old regime and continued in the redistribution of power resources during the early transition. The political fight over economic resources played out in the effort to impose a new tax regime was one of the crucial battlefronts that shaped the state-building process. In conclusion, I summarise the influence of tax collection on three larger issues of state-building in Poland and Russia: tax policy-making and regime type, tax compliance strategies and state capacity, and tax collection and state–society relations. In Poland, a new tax regime was initially imposed by pro-market technocrats insulated from politics. Their attempt to place a disproportionate tax burden on workers in the state sector was resisted with protests and strikes. Instead of coercion, state leaders eventually accommodated the demands of the protesters. A more sympathetic social-democratic government created a more uniform, less discriminatory tax code. Just as important, a formal bargaining mechanism – the Tri-Lateral Commission – was created to give public-sector workers a voice in the tax policy issues that directly concerned them. Tax policy had provoked a political conflict that was resolved by making the state more responsive to societal interests. From this point, the state would refrain from assigning new revenue claims without a process of consultation and negotiation. By channelling protest politics into inclusive political institutions, this early conflict over new revenue claims contributed to the consolidation of a democratic regime in Poland. In Russia, a new tax regime targeted the income of profitable export commodity firms and the most economically productive regions. This policy was resisted by the newly empowered business and regional elites, who claimed for themselves the valuable assets of the old command economy. An elite bargaining revenue strategy was employed: tax policy was manipulated in discrete deals made between agents of the central state and these post-communist elites. Special privileges were doled out on the basis of elite privilege. Because the state was able to gain access to concentrated and lucrative income sources, it did not have to create bargaining mechanisms with trade unions and political parties. The
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battles over tax policy were mainly an intra-elite affair, as were postcommunist Russian politics more generally. Eventually, the terms of the first revenue bargains were overturned by the use of coercion against the post-communist elites. The tax policy process changed as well. The state eliminated many special tax deals, created more routinised channels for corporate interests and increased its capacity to impose tax policy changes. The 1993 Russian Constitution contained the elements of undeveloped democracy and latent authoritarianism. As demonstrated in the Yukos affair, the political battles over tax collection eventually contributed to the cultivation of authoritarianism. Next, tax compliance strategies influenced post-communist statebuilding. The Polish post-communist state has outperformed its Russian counterpart in macro-level indicators of tax compliance. Societal perceptions of exchange and contingent consent best explain this development. The Polish state put little effort or resources into coercion as a means of persuading its citizens to pay taxes. Instead, the state successfully developed a system of ‘quasi-voluntary’ societal compliance with its new revenue claims. The consent of society, in turn, has facilitated the development of the fiscal capacity of the state. It has successfully expanded its revenue base, tapping into reliable, if not terribly lucrative, income streams. On the basis of these new revenue sources, the Polish state survived the challenge of the international financial crisis of emerging markets in the late 1990s. The income from these revenue sources enabled the Polish state to develop the capacity to provide public goods and services. The political capacity of the Polish state has been enhanced by the legitimacy of its revenue claims in society. Russia scored less well than Poland on a series of tax compliance indicators. Tax evasion was far more pervasive. The compliance strategy was also different. Russia failed to nurture notions of exchange and contingent consent. Instead, Russian taxpayers saw a breakdown in the provision of public goods and services, and an unfair and unevenly distributed tax burden. In response, the state attempted to raise the costs of evasion through the threat of coercion. In the second half of the 1990s, the state employed a ‘bureaucratic-coercive’ compliance strategy, aimed at striking fear into taxpayers. But the use of this strategy, at least at first, was ineffective and failed to reverse the trend towards non-compliance. Fiscal capacity remained weak and the Russian state suffered a fiscal collapse in 1998. With the first revenue bargain undone, coercion has more recently been targeted at the big business tycoons, with some effect according to preliminary evidence. Meanwhile, a radical tax reform has lowered the costs of compliance for individuals and small businesses, also with some success. Beyond tax reform, however, state capacity has
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benefited from revenue gained from energy exports. As a result of this lucrative income source, the state has operated with a budget surplus for the past five years. Yet the Russian state has still not managed to expand its revenue base and remains dependent on income derived from a select group of corporations and regions. Finally, post-communist state-building is about the redrawing of the boundaries between state and society. In Poland, the 1997 Constitution formally stated that no agency of the Polish state could make a revenue claim or seize economic resources without a supporting legislative statute. The Constitutional Tribunal emerged as the institutional embodiment of this clause. Poland has developed legal mechanisms to resolve revenue disputes. The accumulation of the outcomes of the numerous state–society conflicts over taxes has contributed to formalising the boundary between state and society. Poland developed a network of non-governmental organisations (NGOs) to monitor and check the state’s tax policies and practices, and the Polish state recognised a realm of autonomous economic activity. In this way, private property became a foundation for the consolidation of a post-communist civil society. In Russia the initial tax regime empowered the state to make revenue claims on society and transposed over society a set of categories denoting the status and duties of taxpayers. But it did not provide legal rights or institutional protections for society against the claims of the state. The unwillingness to set formal limits on the state’s right to make claims on society, particularly regarding economic resources, became an enduring feature of post-communist Russian politics. Economic resources often seemed to be treated more like state concessions, rather than protected private property. The coercive and bureaucratic–legal resources of the state were not constrained by an empowered civil society. They were limited more by the disposition of political executives than by legal institutions. In Russia, tax collection was an arena in which the line between state and society remained blurred, and institutional and legal checks on state power remained weak. Along these lines, the political battles and bargaining that were involved in the building of new tax regimes helped to shape the postcommunist Polish and Russian states. The alternative state-building paths of these two cases were representative of the more general variation that has come to distinguish the post-communist states of East Central Europe from those of the former Soviet Union.
4
Taxation and coercion in rural China Thomas P. Bernstein and Xiaobo Lu¨
4.1
Introduction
Contemporary China faces two fundamental challenges: building the administrative capacity appropriate for a ‘socialist market economy’, and accommodating the increasingly strong pressure for political participation and accountability. In rural China, where developmental policies coexist with predatory local state practices, both these challenges come into play. This chapter deals with burdensome irregular and unpredictable taxation, which has caused peasant resistance, confronting the central government with the task of constructing a system of revenue raising that would fund public goods while minimising abuses of taxpayers by local authorities. There is a long history of conflict around rural taxation in China. Eighty years ago, Thomas Millard (1926) commented that, in China, ‘revolutions start with the tax collector’. Revolutions and violent resistance are at one end of a continuum of possible responses to abusive taxation and arbitrary imposition of fees. Coercive revenue collection may provide resources to the state, while creating perceptions of unfairness and arbitrariness. Yet fair and predictable behaviour on the part of public agents – and some kinds of clear benefits in return for tax contributions – matter a great deal in building viable states and fostering political participation and accountability. If revenue raising is to make a genuine and lasting contribution to increasing state capacity, governments need to curb extraction and secure societal cooperation. The Chinese countryside has undergone dramatic changes in the last two decades, but the benefits that came with them have not been distributed evenly. In the eastern provinces, the spectacular growth of township and village industries in the 1980s and 1990s enabled the local authorities sharply to reduce peasant burdens. Profits from local industry
This chapter draws on Bernstein and Lu¨ (2003); Bernstein and Lu¨ (2000); and on recent research.
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allowed them to pay for public goods (see, for example, Oi 1997; Whiting 2001; Zweig 1997). In contrast, rural industrialisation lagged in the central agricultural provinces, and even more so in the western ones. There, rural incomes grew much more slowly. Without access to revenue from non-agricultural sources, local authorities had to squeeze funds from farmers. For a long time local authorities extracted such funds in ways that provoked widespread resistance and became a major source of discontent and widespread resistance. The central government simultaneously sought to curb abusive taxation by ordering local authorities to lighten the burden of the peasants, even as it failed to provide adequate funding for mandated public goods. The delegation of governmental authority to lower levels and the horizontal deconcentration of power complicated this further. Development targets, such as the policy of nine years of education for all children devised by the centre, became ‘unfunded mandates’. To meet them, local officials levied unauthorised taxes and fees from peasants, who had no say in the matter. Officials’ careers were tied to development performance, as measured from above, and not to the views of rural people. Officials regularly ignored directives from the centre that peasants’ burdens be eased. At the same time, the central government was not willing to moderate its developmental objectives by taking into account the limited resources available to officials in agriculture-dependent regions. This undermined its own declared objective of cutting peasants’ tax burdens. Peasants resisted taxes, both individually and collectively. Collective action included peaceful petitioning and more violent protests and resistance. But in the absence of linkages to popular urban protest, they have not developed into broad-based social movements. Resistance nonetheless alarmed the centre, which began to promote policies that would empower villagers to resist illegal exactions, including village elections and transparency in village financial management, in the hope of thereby reducing the incentives for peasants to engage in collective resistance. The central government also adopted deeper reforms, including, starting in 2000, the phasing out of the major agricultural taxes. The next section provides an historical overview of rural taxation and revenue extraction in China. Section 4.3 discusses the structural causes of the problem of high tax burdens. Section 4.4 examines the responses of the central government to the peasant protests, emphasising the extent to which the central authorities agreed that burdens had to be lightened. In Section 4.5 tax resistance and riots are discussed, focusing on the capacity for coordinated actions. Responses from the centre and a possible new deal for China’s farmers are explored in Section 4.6. Section 4.6.2 concludes.
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Rural taxation in historical perspective
In pre-modern, imperial China, both state and society were permeated by Confucian ideology, which emphasised stability, harmony and moderation. This included a commitment in principle, though not necessarily in practice, to keep taxes low so as to maintain popular consent. Formal taxes, the main one being the agricultural tax, did not, however, cover the costs of local government. Hence there emerged a system of informal surcharges, fees and assessments. These were difficult to regulate and control. When they got out of hand, popular protest would erupt as villagers sought to restore a balance between state claims and peasant needs (R. Bin Wong 1997: 235–6). This relatively stable state–peasant relationship broke down periodically, giving rise to massive rebellions. The nineteenth century, for instance, was punctuated by large-scale uprisings which signified that the ruling dynasty was losing popular support. They were harbingers of eventual imperial collapse in 1911. During the first half of the twentieth century, modernising officials in various provinces sought to establish a modern rural government system, able to bring modern services to the population (see Remick 2004). But these efforts were overshadowed by the predations of local governments and social elites, who were no longer restrained by Confucian moderating influences. As Lucien Bianco notes, the major source of peasant grievances was not landlordism as much as it was ruinous taxation (2001: 18). The Communist Party (CCP) was based in the countryside, as a revolutionary movement, between l928 and the late l940s. It sought popular support, but this was complicated by the inevitable demands that the Party had to make on peasants: to supply recruits for the army, maintain a local militia, provide porters for the war effort, and supply grain for the government and the army, i.e. pay taxes. Whenever conditions were sufficiently stable, the Communists sought to institute a reasonable and fair tax-in-kind system, graduated according to the income of households. This contrasted to the harsh and often brutal extraction practised by their opponents, both the Chinese Nationalists and the Japanese occupiers. Overall, the Communist revolution brought about the overthrow of the old elite, the end of landlordism and the redistribution of a large proportion of land. This insured the support of the beneficiaries, the poor peasants.
4.2.1
State extraction during the Mao Zedong era (1949–76)
The most important institutional consequence of the revolution was that, for the first time in Chinese history, central political authority in the form
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of the Communist Party and its auxiliary organisations penetrated all the way to the villages. This allowed the new rulers to mobilise China’s vast peasant masses in unprecedented ways to implement socialist transformation. They were committed to the radical transformation of society. For the peasantry, this meant the collectivisation of the means of production. Ordinary households lost most decision-making authority over production as well as distribution. This fundamental change sharply reduced peasants’ power vis-a`-vis the state. The state, working through its local agents, now controlled the harvest. See Oi (1989) for analysis of how this worked out in practice. Collectivisation was accompanied by the establishment of a state monopoly over the purchase and sale of agricultural commodities, chiefly grain.1 Households and, later, collectives were given delivery quotas. The regime needed this control in order to syphon off the surplus – as determined by the state – in order to help fund all-out industrialisation, the key marker of a strong and developed state. The agricultural tax (‘public grain’) was collected together with the grain that was purchased (‘surplus grain’). The tax-portion of the extractions actually declined in relative terms since it remained at the same rate even as output rose. Direct taxation as an instrument of extraction was far eclipsed by the enforcement of the grain procurement system. The severity of peasant exploitation was in principle limited by the regime’s goal of preserving peasants’ incentives, i.e. their ‘enthusiasm for production’. Sales to the state were limited by the need to maintain agricultural production and subsistence consumption. Extraction was less ruthless and ruinous than that practised in the Soviet Union under Stalin. As Mao Zedong noted, ‘Stalin had too much enthusiasm. He drained the pond to catch the fish’ (Mao Zedong l976–7: 18). At the same time, the growing cities required more and more grain and frequent natural disasters required offsetting, additional purchases in non-disaster areas. The margin of what villagers could tolerate was often exceeded, leading periodically to peasant protest and violence. During the mass mobilisation of the ‘Great Leap Forward’ (l958–61), extractions were carried to bizarre extremes, contributing greatly to the world’s largest famine, in which around 30 million people perished. This was the product not of a Stalin-type ‘war’ on the peasants, but of the collapse of the statistical reporting system, as lower-level leaders, under intense pressure to report miracles, greatly exaggerated output data, encouraging ruinous 1
In the 1960s and 1970s, many developing countries, especially in sub-Saharan Africa, introduced similar policies, as reflected in implicit taxation via marketing boards. See Bates (1981).
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increases in procurements (see Bernstein 1984). During the rest of the Mao era, extractions were moderated to some extent but continued to be a major source of state–peasant conflict. At all times, the Chinese Communist Party (CCP) made strenuous efforts to mobilise peasant support. It used intense ideological campaigns and kept alive the revolutionary notion of class struggle. A subset of villagers probably identified with the goals of the regime and the glorious future that it promised, but for most the engineering of consent had little lasting impact, because the regime was only marginally successful in improving peasants’ lives. By l978, when the reform era began, peasant incomes were not much higher than they had been twenty years earlier, even though agricultural output had doubled as chemical fertiliser and new seeds came on stream. Mao’s successors faced a difficult task of reviving farmer incentives. 4.2.2
Changes in state extraction and taxation in the reform era (1978–present)
Tax practices in this new era must be seen in the context of broader economic changes. Reform leaders dramatically repudiated radical Maoist ideas, such as the notion of permanent class struggle, and instead focused on modernisation. In time, they learned that economic progress required the gradual abandonment of central planning and of direct state management of the economy, and their replacement by a ‘socialist market economy’ – a regulatory state capable of steering but not managing economic development. For society and the individual, the reformers sought to unleash individual and family entrepreneurship. They accepted the inevitability of widening inequalities, at least in the short term, and essentially abandoned the ethos of collectivism. This fundamental change in direction took place under continued Communist rule, which was in the main authoritarian rather than totalitarian. While tolerating no challenge to the continued monopoly of power by the Communist Party, the reform leaders encouraged greater debate and openness. They proved willing to introduce very limited free elections at the lowest level of authority, the village. The goal was to tackle the increasingly pressing issue of conflict between local cadres and the peasants. ‘Growing out of the plan’, to quote the title of an important study, was a prolonged process that in some respects is still under way, especially in the case of ancillary institutional and administrative reforms (Naughton 1995). Rural China was the first target of the reformers. The People’s Communes were gradually replaced by a limited form of family farming in which land continued to be owned by the collective. The restoration of limited household autonomy revived incentives. State procurement quotas
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were continued but were made much more attractive by sharp increases in state prices. The invigoration of free markets outside the framework of the plan provided a still further stimulus. Farmers’ incomes doubled by l984. In the later l980s and the l990s, however, farmers found it more difficult to increase their incomes. They actually stagnated for some years. State procurement prices declined because the government found that purchasing increasing surpluses was too expensive. The procurement system thus became far less advantageous for farmers than it had been until l984. At the same time, farmers were increasingly exposed to the vagaries of the market. Price differentials between farm and manufactured goods persisted. They constituted an indirect tax that drained resources from the countryside to the benefit of the rapidly developing urban sector. Gradually, the idea of support prices took hold. 4.3
Structural sources of the peasant tax burden
From around 1985 until recently, state–peasant relations revolved around conflict over an array of taxes and fees widely perceived by peasants as excessive. This led to sporadic but serious protest and resistance. The sources of the problem lay in development policies, in the decentralisation of finance but simultaneous continued centralisation of power, and in lagging governance capacities. China’s leaders were thoroughly committed to rapid economic development, a goal that for long took precedence over other objectives such as limiting environmental damage. One strategy for speeding up development, in the leaders’ view, was decentralisation of decision-making authority to the provincial and sub-provincial Party committees and governments. In the l980s, one form of this was to confer special privileges on provinces with the strongest potential for accelerated growth, such as Guangdong, which bordered Hong Kong, Fujian and, eventually, Shanghai and eastern provinces to its north. Under this ‘coastal development strategy’, these provinces were allowed to retain much larger shares of tax revenues and profits from state enterprises. This enabled them to build infrastructure, such as port facilities with which to attract local and especially foreign investors, the latter also being eligible for large tax exemptions, especially in the Special Economic Zones. Moreover, protected by provincial and local political authorities, entrepreneurs were able to underpay or evade taxes. Hence, for some years the most rapidly growing economic sectors were under-taxed. These policies indeed contributed to the economic miracles of eastern China. They also contributed to the rising prosperity of eastern villages. There, market access and investment by overseas Chinese created
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opportunities for the astonishingly rapid rise of ‘township and village enterprises’ (TVEs). Collectively owned, the TVEs enabled local leaders, often Party Secretaries who now assumed entrepreneurial roles, to fund public services and public goods, including roads, education and healthcare. Sometimes, those villagers who continued to farm were freed from taxation altogether. In contrast, the large agricultural provinces of central and western China generally lacked these advantages, creating a division between agricultural and industrial rural China. The tax and fee issues with which this chapter is concerned were primarily issues of agricultural China. By the early l990s, the downside of policies that favoured the coastal provinces became apparent in the form of precipitous drops in China’s tax revenues, from around 37 per cent of GNP in l980 to around 11 per cent, significantly below the ratios of tax to GDP in other developing countries (Wang Shaoguang and Hu Angang l999). Moreover, the portion of total revenue accruing to the centre shrank alarmingly, sharply constraining the ability of the central government to redistribute to the interior provinces the financial resources that might have helped them attain greater equality with their eastern neighbours. In l994, a new tax system was put in place. It was designed to increase central revenues as well as the overall proportion of revenue to GNP. But this reform failed to accomplish its goal of providing more resources to the interior provinces. This was largely because the bargaining strength of the richer and more successful provinces allowed them to secure tax rebates that offset the increased taxes that they were supposed to pay (Lee 2000). Moreover, the new tax system in effect deprived localities of tax revenues that now had to go to the centre. This decrease had to be offset by in some way finding other local funds. Transfer payments from Beijing failed to offset these losses. Unbalanced tax policies caused great difficulties for the agricultural provinces in central and western China. Local revenues did not suffice to fund normal administrative operations, development projects, and public goods and services. These difficulties were aggravated by other decentralisation measures that greatly reduced central support for rural education and other social services. Expenditure responsibilities were delegated to lower levels but without corresponding allocations of revenue to meet them.2 Consequently, local authorities in areas without access to profits and taxes from local industries resorted to extracting funds from villagers. 2
See Christine Wong, ‘Can China Change Development Paradigm for the 21st Century? Fiscal Options for Hu Jintao and Wen Jiabao after Two Decades of Muddling Through’, unpublished paper (2005).
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The fundamental source of the problem of increased peasant financial burdens was an enormous funding gap in local revenues. Notwithstanding the decentralisation of expenditure responsibilities, China was and still is a centralised state in which the centre often fails to adjust task assignments to local economic conditions. Local authorities were ordered to provide the same services regardless of the resources at their disposal. Policies, as the Chinese would say, were promulgated with ‘one cut of the knife’. Officials of the counties and townships – the lowest level of state government – were evaluated according to the extent to which performance quotas handed down from above were fulfilled. Hence, they felt under great pressure to find the necessary funds somehow. In education, for instance, a national goal stipulated that children everywhere should go to school for nine years. For local officials this was an unfunded mandate and hence could not be achieved without charging villagers large fees for tuition, school construction and maintenance. Educational expenses became a major stimulus for these new burdens.3 Unified pay scales for civil servants were another consequence of rigid centralisation. This meant that the incomes of state cadres were often higher than the pay of cadres not on the state payroll budget in areas where the cost of living was below average. This created strong incentives to secure state cadre jobs so as to be able to ‘eat the imperial grain’, all the more since civil service wages doubled after l999. In l980, the top tier of each People’s Commune required eight full-time cadres. By the l990s, its successor, the township, had an average of thirty cadres; and by 2000 this had exploded to 300 (Wen Tiejun 2000). The wages of most of these employees came from local resources – so-called ‘extra-budgetary funds’ which in agricultural areas were extracted from villagers (see especially Lu¨ 1997). It was estimated that 40 per cent of farmers’ taxes were used for township-level administration. An average of sixty-eight farmers were required to fund one cadre.4 4.3.1
Local taxes and fees
The various exactions imposed on peasants are summarised in Table 4.1. Of this menu, fees, fines and apportionments – the ‘three chaotics’ (san luan) – were the most resented because they were unpredictable and arbitrary. Fees and apportionments were the product of unfunded 3 4
See Han Hongjie (l997) for an analysis of the financial impact of the policy of nine years of education on villages in Chengdu. http://news.163.com/2004w03/12478/2004w3_10781149674351.html (accessed 26 May 2007), orginally from Xinhuawang [New China News Agency Net] 3 March 2004.
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Table 4.1 Taxes, fees and apportionments imposed on Chinese peasants Type of taxes, fees and apportionments
Items and explanations
State taxes
Agricultural tax and surcharge; special products tax; slaughter tax; farmland utilisation tax; contract tax; animal husbandry tax; education surcharge. Village levies: three purposes – collective investments, welfare, cadre compensation. Township levies: five purposes – schools, family planning, support for veterans, militia, and road construction and maintenance. 5–10 days of labour on flood prevention afforestation, roads or school construction; 10–20 days on ‘accumulation labour’ on state water conservancy or afforestation projects. Examples: for road or school construction and other local improvement projects; newspaper subscriptions, purchase of insurance, marriage certificates, etc. Collected by numerous government agencies for infractions such as birth control violations. Compulsory grain sales to state at below market prices; while industrial inputs were priced relatively high; local abuses such as payment in IOUs not cash.
Township and village levies (including village retention and township comprehensive fee)
Corvee labour services, often monetised
Fees, fundraising and apportionments regardless of income
Fines
Burdens connected with peasant sales to state (‘hidden burdens’)
mandates sent to the countryside by central agencies which authorised local officials to charge fees or allow fundraising in order to promote their missions to develop or regulate the countryside. In 1991, the Ministry of Agriculture found 148 documents issued by forty-eight ministries and commissions that authorised the collection of fees or of fundraising. These ranged from the Ministry of Agriculture, which, ironically, was put in charge of implementing burden reduction, to the ministries of Public Security, Water Resources, Public Health, Civil Affairs, etc. In addition, projects launched by centre-level agencies often entailed the setting of targets handed down to the local authorities, for the meeting of which they competed and demanded cash, goods or labour from peasants such as building homes for the aged, or schools (see Li Qin 1992). Centrally set fees cascaded down the hierarchy. Lower-level units might add to the higher-level fees or add fees of their own, often in the
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belief that peasant incomes had risen and that a small charge would do no harm. In 1985, in Songhuajiang prefecture, Heilongjiang, peasants paid ninety-five different fees: fifty-eight to provincial agencies, ten to prefectural agencies and twenty-seven to county and township departments (RMRB 17 November 1985). In l993, when peasant riots caused much anxiety in Beijing, the top leaders slashed many fees and ordered an end to target-setting programmes. This worked for a while, but the fees simply rebounded because performance demands on the rural officials were not correspondingly reduced. In the later l990s, fee menus as large as those in Heilongjiang in l985 were common. Thus, poor governance manifested in lack of bureaucratic coordination, failure to set priorities and unrestrained ambitions to develop at maximum speed regardless of local limits were responsible for a major proportion of the increases in peasant burdens. The ‘three chaotics’ enabled local officials to charge fees that exceeded the legal limits for numerous services, such as registration of births or issuing of licences. When the state sought to enforce a rule that the township and village levy could not exceed 5 per cent of incomes, cadres would switch to fees or raise fines (see Li Qin 1992). Fundraising was supposed to be voluntary but often took the form of compulsory assessments on all households. Officials imposed fines for numerous minor infractions. Violations of the rules on spacing children lent themselves to lucrative fines: if a second child was born within five years of the first, a fine of 2,000–5,000 yuan might be imposed.5 Needless to say, officials found plenty of ways to divert the moneys so collected to other uses, e.g. for the purchase of official cars, the building of prestigious and flashy Party-government compounds or for ‘wining and dining’. Whatever the use to which they were put, fees, fines and assessment sometimes made up a large proportion of local revenues. In l996 the Ministry of Finance found that peasants in a county in Hebei Province in northern China had paid a total of 27.7 million yuan in taxes and fees, of which an astounding 71.5 per cent came from various fees (Gu Kang, Bai Jingming and Ma Xiaoling 1999). 4.4
Effects of local taxation on the rural population
Given the informal nature of a major part of the exactions, accurate statistics on just how much villagers paid are hard to come by. Local officials naturally had an incentive to conceal their extractions from
5
Interviews, Wuhan (September 1998).
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Table 4.2 Tax burdens as a proportion of per capita peasant incomes in China, 1996 Income bracket (yuan)
Taxes as percentage of income (%)
400–500 800–1,000 1,500–1,700 2,500–3,000 4,500–5,000
16.7 8.7 6.7 4.9 2.8
Source: Sun Meijun 1998: 7–12
higher authority. In 2001, Premier Zhu Rongji reported that 120 billion yuan ‘or more’ was being extracted from villages each year: 30 billion in state taxes, 60 billion in township and village levies and the rest in unauthorised fees.6 A widely used estimate is that around 20 per cent of villager income was taken. But there was wide variation. In areas rich with township and village enterprises, the burdens might be minuscule. In sharp contrast, in agricultural China, there were many households ruined by taxes and fees, especially when extraction of taxes was also accompanied by illicit lowering of procurement payments. In any event, burdens rose over time. The rate of increase exceeded the growth in the rate of farmer incomes, especially in the years 1997 to 2002, when the latter stagnated. It is important to note that burdens were regressive. Based on their analysis of income distribution in 1988 and l995, Khan and Riskin (1998) conclude that ‘the burden of net rural taxes is largely borne by households who are poor in the rural context and extremely poor in the context of China as a whole. Therefore, a reduction in net taxes on rural households would have a strongly equalising effect’ (ibid. 249). Moreover, they show that, compared to 1988, rural taxes were much more regressive in l995: ‘the poorest decile’s share of net taxes was 12 times its share of income, while the richest decile had a high negative rate of net taxes (net positive transfer from state and collective)’ (ibid. 240). National-level data demonstrate the reality of the regressiveness of tax burdens as shown in Table 4.2. These data probably exclude fees, fines and apportionments: ‘It is worthy of attention that the fee menu . . . is in most cases uniformly assessed regardless of whether a household is rich or poor’ (Wang Yushao 1997: 30).
6
RMRB overseas ed. (16 March 2001). 1 US$ ¼ 8.2 yuan.
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Table 4.3 Regional variations in tax burdens on the rural population in China, 1996 Per capita
East
Central
West
net income (in yuan) Burdens (in yuan) Percentage of income
2,549 100 3.9%
1,763 141 8.0%
1,289 73 5.6%
Source: Wang Yaoxin and Lu Xianzhen 1997: 7–12
Regionally, the burdens were highly regressive. Rural incomes were high in the coastal provinces, medium in the central belt and lowest in the west. The relative tax load, however, was lowest in the richer east and highest in the central region, where most grain-producing provinces are located (see Table 4.3). Many of the poorest villages, often located in the west, were simply unable to pay any taxes, but then, they also received no services. The contrast between east and west is striking: In Qufu village in the eastern Shandong Province, profits from township and village enterprises enabled the ‘government to finance some 400,000 yuan in public expenditure’ even as it heavily reinvested in TVEs. In contrast, villages in the poverty-stricken western Guizhou Province ‘spend nothing for education and health; their public expenditures are confined to paying nominal salaries . . . to village officials and these are financed by a levy on each villager’ (C. Wong 1997: 199). It is not surprising that policy-makers and researchers alike saw the ultimate solution to the burden problem – and rural poverty generally – in the industrialisation of the countryside. 4.4.1
Collection costs and methods
Needless to say, the tax and fee system was not in any sense based on the consent of the governed. Hence, the transaction costs were very high, consuming a large proportion of cadres’ time. They often relied on ‘pian, hong and he’ (‘deception, roaring and intimidation’), and the use of force (Shanghai Lingdian Shichang Gongsi l998: 24–8). Central directives are evidence of the use of force in the collection process. ‘We should strictly forbid’ coercive collection efforts such as the mobilisation of expeditionary ‘small detachments, work teams, or shock teams’ that come from the townships and invade villages, ransacking homes, confiscating grain, furniture, or livestock, which might or might not be returned when the household in question comes up with the required cash. ‘The use of
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instruments and methods of dictatorship to collect money or goods from peasants is strictly forbidden’.7 Accounts in the Chinese media depict callous, officious and cruel officials bullying and beating peasants in violation of the Party’s ‘mass line’ of doing painstaking ‘ideological work’ (Tang Yinsu l991: 18–19). For detailed descriptions of several such cases see Chen Daolong (1994). Fines and property confiscation were the ‘favorite means [used by] some local cadres against disobedient peasants’ (Beijing Review 13–19 January 1992: 37–8). In 1996, a journal published for officials reported that, when cadres came to a village in Hubei Province to collect money, peasants would shout ‘guize jin cun le’ (‘the devils have come’) as if the officials were Japanese occupiers from whom they should hide (Xinhua Neican Xuanbian 1996: 4–5). In September l998, Nanfang Zhoumou, a muckraking weekly, reported on a search mission in Mengzi County, Yunnan Province. Accompanied by a group of forty men, the head of the township assembled in front of the house of peasant Liang Faling late at night, shouting, ‘whoever moves will be beaten to death’, severely mistreating the family because of failure to pay a charge of seventy five yuan (Nanfang Zhoumo 11 September l998). In connection with the requisitioning of money and grain, deaths have occurred in the provinces of Jilin, Hubei, Hunan, Sichuan, Anhui, Jiangsu, Hebei, Henan and elsewhere (Chen Daolong 1994: 5). That these were not isolated cases is indicated by a central government ‘decision’ published in April 1997 which called for the leaders responsible to be subjected to criminal investigation ‘when higher tax burdens lead to grave incidents including deaths or serious injuries’. Leaders of the provinces in question were to submit written investigation reports to the centre (RMRB 1 April 1997). Villagers had strong ideas about the legitimacy of particular exactions. In 1983, in Taoyuan County, Hunan, villagers beset by heavy burdens agreed that they should pay the agricultural tax, support military dependents and help the poorest, the sick and the aged who lacked family support. But they objected strenuously to paying for cadres, for the training of Party members and for the high cost of collective investments. They also objected to a charge imposed to pay for construction of a power station, the completion of which had been long delayed, and which, once in operation, would still charge them for electric power. Moreover, villagers thought the state ought to pay for teachers and for one-child family awards (Chen Yimin 1983: l9–20). 7
See the directives published in RMRB (1 April 1997) and Xinhua (8 December 1996). For an earlier directive, see Zhonghua Renmin Gongheguo Guowuyuan Gongbao [PRC State Council Bulletin] (2 September 1993, no. 18: 856).
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Grievances about burdens were rooted in expectations of equity, fairness and justice that had their origin in imperial times. In principle, the state shared these sentiments. It defined ‘reasonable’ burdens as those based on analysis of what was tolerable and what was fair. An explication of the 1993 ‘Law on Agriculture’ justified the 5 per cent township and village levy by claiming that ‘this ratio was arrived at after comprehensive statistical and survey investigations’. It is based on the actual income level of the peasants and on their capacity to endure (Luo Yousheng and Sun Zuohai 1993: 56). Lack of accountability was the major grievance: ‘It is both reasonable and lawful for peasants to pay grain (taxes). We peasants are not confused about this. But they just take money from us in a muddled way. We give grain and don’t know which ‘‘lord’s’’ pocket it ends up in’ (Nongmin Ribao 20 January 1988). Lack of accountability enabled officials to use their power for private gain, since the decision as to how these funds were used was usually subjective and dependent on the whim of the local authorities (Tang Ping l992: 32–4). 4.5
Tax resistance and violence
It is not surprising that the tax and fee system provoked resistance and violence. Over time, there were increases in the frequency and intensity, level of organisation, local coordination and quality of leadership of villagers’ protests against burdens. An authoritative analysis of both urban and rural protest published in 2001 by the Party Central Committee’s Organisation Department stated that ‘frequently hundreds and thousands and even up to 10000’ persons were participating, adding: What is especially worthy of attention is that at present the frequency of collective incidents is rising more and more, their scope is broadening more and more, the feelings expressed are becoming fiercer and fiercer, and the harm they do is becoming greater and greater . . . The organizational level is visibly becoming higher. Formerly, incidents were mostly spontaneous and fairly loose. Now, many have leaders, are organized, and behind the participants there are core elements who exert influence and control. Some even hire lawyers and seek media support. (Zhongguo Zhongong Zuzhibu Ketizu 2001: 67, 285 and 385–6)
Collective violence occurred in a variety of settings. In Hua County, Henan Province, peasant incomes had dropped in l994, but forcible collections of funds continued. In December 1994, the local government started collective fundraising for road and canal construction and also imposed new education fees. Each peasant was required to pay between 120 and 145 yuan within three days. Failure to comply would result in the closing of the schools and the dispatch of heads of households to a ‘study class’. On 26 December, close to a thousand peasants attacked the town
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government. The Ministries of Supervision and Agriculture learned of this and sent a team which imposed Party and governmental disciplinary measures on the officials. The article noted that similar vicious incidents had occurred in Hunan and Guizhou (Wang Yanbin 1995: 11–13). When groups of peasants fruitlessly visited higher-level authorities to seek relief, anger might rise, more villagers might arrive to reinforce their vanguard, police might then order the group to disperse and violence might ensue. In 1996, in Qidong County, Hunan Province, thousands of peasants petitioned authorities in Baiyunqiao town to reduce burdens. Public security officers sought to disperse them, using tear gas and injuring three peasants. Peasants then invaded government offices, breaking windows and smashing desks. In this case, the town paid compensation for the injuries and publicised burden reduction measures (Ming Pao 8 November 1996; South China Morning Post 11 November 1996). By the mid l990s, tax and fee protests had become common. Between August and November of l995, twenty-two counties in the provinces of Shanxi, Henan and Hunan were affected (Guan Jie 1995: 18–19; Li Zijing 1997: 19–21). Between mid-May and mid-June 1997, another major wave of unrest arose in Hunan, Hubei, Anhui and Jiangxi provinces, involving an estimated half a million participants (see Table 4.4). In 1999, various sources report 53,000 rural incidents with over 5 million participants. Major disturbances took place in Jiangxi in 2000, and again in 2001.8 In December of 2002, more than 80,000 peasants in fifteen townships in Yulin prefecture, Shaanxi, protested against ‘exorbitant taxes, harsh levies and exploitation’. They appealed to provincial leaders and to the State Council for help, claiming that they had been forced to rebel like the legendary bandits in the popular novel Water Margin (Yue Shan 2003: 17–19). Similar reports appeared in 2003 and 2004 (Yue Shan 2004: 16–18; Li Zijing 2005: 10–11). One estimate is that in 2004, 74,000 incidents erupted in all sectors of Chinese society (New York Times 19 July 2005). Nonetheless, burden protests did not pose a threat to the regime itself, even when added together with social protest in other realms of Chinese society.9
8
9
Yue Shan (2000: 21–3); Agence France Press (29, 30 August 2000); Baltimore Sun (12 February 2001) quoting the Information Center for Human Rights and Democracy, Hong Kong; Baltimore Sun (18 April 2001); New York Times (20 April 2001). Members of major social groups have become increasingly assertive in their quest to secure redress of grievances. In the cities, laid-off workers, pensioners and residents subject to urban renewal programmes took to the streets to protest their treatment by the government. In the countryside, sources of unrest other than the financial burdens included protests by villagers downstream against pollution of rivers by upstream factories. Peasants protested when development projects encroached on traditional burial grounds, riding
14–19 May 1997
17–22 May 1997
Mid-May to mid-June 1997
20 May–17 June 1997
Hubei
Henan
Jiangxi
Anhui
Source: Li Zijing 1997
Dates
Province
70,000
100,000
200,000
120,000
Number of participants
Peasants in sixty townships in four counties in Jingzhou prefecture staged around seventy demonstrations in opposition to peasant exploitation and official appropriation of peasant fruits of labour. In Tianmen County, 3,000 villagers attacked county Party and government buildings; ninety injuries resulted. In Yiyang and Changde prefectures, peasants in eighty townships in five counties staged eighty incidents of assembly ( jihui ), demonstrations and submission of petitions. In several instances, peasants burned vehicles and attacked county governments. Three deaths and fifty-four injuries resulted. Peasants in seventy townships in five counties in the three prefectures of Jiujiang, Yichun and Jian occupied county Party and government buildings, and attacked supply and marketing cooperatives where they plundered fertiliser and cement. In Yifeng County, 800 people attacked the Public Security bureau. In some cases, leading cadres from the province and the prefecture were surrounded and had to be rescued by the military. Peasants living in forty townships in five counties in three prefectures staged some sixty incidents. Aside from attacks on official buildings, in two counties peasants seized guns and ammunition. In Xiaoxian, 500 blocked a cargo train and seized goods, resulting in armed confrontation with the Public Security branch of the railroads. Forty injuries and eleven deaths resulted, five of whom were police.
Collective actions
Table 4.4 Major peasant protests in China, 1997
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4.5.1
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Riots as collective actions
Some protests erupted spontaneously, for instance when farmers gathered on market day, and when some spark precipitated a short outburst ‘of accumulated frustration and rebellious feelings – followed by quiescence’ (Shanin 1971: 258). But some collective actions were planned and organised by discernible leaders. Leaders of collective protests were mainly respected villagers who did not hold office. To a lesser extent, they were unelected village cadres and Party members. Some data suggests that those cadres closest to the peasants at the very lowest level of the hierarchy, the heads of the former production teams, now called ‘groups’, were most likely to sympathise with the peasants. But most leaders were not village-level office-holders: ‘In recent years, in some villages where cadre–mass relations were tense, ‘‘peasant leaders’’ have appeared. Under their leadership, organization, and slogans, peasants engage in collective petitioning, accuse cadres, even surround and attack basic-level Party and government organs. What are they, heroes or troublemakers? Where does their ‘‘magic power’’ come from?’ (Banyuetanneibuban 2000: no. 2: 1–22). Also called ‘burden reduction representatives’, ‘collective petitioning representatives’, or ‘representatives of peasant interests’, such leaders had a record of outspoken advocacy on behalf of peasants. They remonstrated with township officials, and, if this did not work, they led groups to petition higher levels, often all the way to Beijing. They were involved in frequent clashes with the authorities.10 These leaders were better educated than ordinary peasants and were relatively young. Many veterans did not have positions commensurate with their background and experience, a possible motivation to lead or participate in protests. Other leaders were or had been teachers and hence had connections with both ex-pupils and their parents. Undoubtedly the most important resource that motivated organisation of collective actions was the knowledge that the central authorities themselves opposed excessive burdens and were therefore on their side. Peasant leaders adopted a strategy of ‘rightful resistance’, pitting the central government against local agencies, utilising policy directives
10
roughshod over deeply held customary beliefs. In areas subject to rapid industrial or residential development, especially in the suburbs of major cities, peasants protested the taking of their land without adequate compensation for their houses and lost livelihoods. By 2005 the land issue eclipsed tax and fee burdens as the major source of rural unrest, since by then, the burden problem was well on its way to a solution. This section draws on several research papers published in 2003 by Chinese scholars who did lengthy field investigations. See Yu Jianrong (2003). Yu investigated twenty townships in H county over a three-year period.
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from higher authorities to legitimise their actions, while local officials sought strenuously to keep villagers from knowing about such directives. Peasant representatives understood national policy, and they often framed their protests as a re-enactment of the traditional scenario of ‘officials driving people to revolt’ (Li and O’Brien 1996; O’Brien and Li 1995). They legitimated their roles by claiming that they were acting in the name of the centre and that they were only opposing local officials who were grossly violating Party–state policies.11 This approach served to confine the goals of protests. When burdens were in fact lightened, villagers tended to be satisfied. Peasants wanted to restore a proper balance between the claims of the state and their own. That they wanted to inform higher levels of the hierarchy of their plight indicates trust in the system as a whole. As one scholar explained, illegal forms of protest such as sit-ins, lying down in front of cars or blocking railway lines often were the only way to get attention.12 The implicit danger in this centre–peasant alliance was that if the centre proved unwilling or unable to meet peasant demands, they might then turn against the Party. Thus far, this has not happened. Rural protests were ultimately limited in impact because they were dispersed and localised, with little evidence of coordination across administrative jurisdictions larger than counties. In some cases, disorders did spread to several townships within the same county. In others, protests broke out in adjoining or nearby counties at about the same time. These cases are perhaps suggestive of contagion effects, the habituation to a ‘repertoire of contention’ and perhaps of horizontal communications and coordination. But for the most part collective protests lacked the capacity for the sustained and coordinated actions needed for effective social movements. The regime metes out harsh punishment to those who seek to mobilise people across administrative boundaries or to bring members of different social groups together. This is an important reason why the escalation of protests in the various sectors of society has not had a greater impact.
11
12
Chinese researchers reported that these leaders’ fearlessness, courage and readiness to sacrifice were significant political resources. One such ‘hero’, by the name of Hong, had led peasants to resist handing over a local tax, resulting in a physical altercation with town cadres, after which he was sentenced to three years for disturbing public order. After his release in September 2001, Hong again led petition groups on behalf of burden reduction. He proclaimed: ‘As I long as I have life in me and as long as the CCP hasn’t collapsed, I will petition to the end . . . To die for the Party and peasant interests is glorious.’ Peasants praised him highly for voicing his outrage at injustice. Interview, Beijing (10 September 1998).
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The literature on revolution indicates that an urban–rural alliance is a key to success. The rural tax riots involved no such linkage. Those in the urban sector, students and intellectuals, who are the natural leaders of movements aiming at political change, did not display serious interest in rural grievances or in making contact with rural people. The classic illustration is the Tiananmen movement in l989, when, as Elizabeth Perry observes, protestors failed to take advantage of ‘peasant capacities for collective action’ (1992). These urban intellectuals disdained peasants and feared them as a force for chaos. The deep cleavages between the two sectors that developed during the Mao era and that persisted were the underlying obstacle to urban–rural cooperation. Migration to the cities has not increased urban–rural solidarity and, if anything, led to friction (Solinger 1999, especially Ch. 4). Moreover, the massive lay-offs of industrial workers that began in the mid l990s in connection with the restructuring of state-owned industry had the potential of exacerbating urban–rural tensions, as competition intensified between urban workers and rural migrants seeking jobs. Some cities began to impose restrictions on migration and promoted the return of migrants to the countryside. On the rural side of the divide, there was much evidence of resentment of the urbanites. An urban–rural alliance against the regime was always highly unlikely. 4.6
Responses from the centre
The central authorities did not condone protests. They suppressed them, singling out the ringleaders for punishment. But as noted, they sided with the peasants on the burden issue. In Beijing’s view, heavy taxation jeopardised peasant support for the Party and government, and constituted a major political problem. Burdens that greatly exceed peasants’ capacity to pay and burdens that had increased time and again were causing severe discontent, damaging peasant incentives and threatening rural stability (State Council Bulletin 1985: 1043–6). When rural rioting was perceived as particularly serious, the Central Committee and State Council responded with a slash-and-burn approach to burden reduction. In 1993, for instance, they abolished thirty-seven fees and fundraising programmes and cancelled forty-three target-setting programmes. After the July–August 1997 riots in Jiangxi and Hubei provinces, the Premier of the State Council Li Peng, sent a powerful work team to investigate. It ordered payment of all ‘IOUs’ (official promises to pay for grain and other commodities sold to the state) and abolished twenty-one taxes and fees. It also ruled that most peasants who took part were not to be held responsible. Then Vice Premier Zhu acknowledged the legitimacy of the
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protests. He accused the leaders of the two provinces of dereliction of duty and ordered swift punishment of ‘local tyrants’ who had abused their authority (Yue Shan 1997: 21–3). The central leaders took many steps to bring burdens under control: ‘Every year since 1985, the Party Central Committee and the State Council have stressed the need to lighten peasant burdens. To this end, they have spared no efforts to promulgate documents, hold meetings, make arrangements and have their leaders deliver speeches. Nonetheless, the result is that peasant burdens have become heavier each year, and the excuses used to collect money from peasants are multifarious’ (Li Xueyi and Zhang Houyi 1993: 26). Administrative pressures to reduce burdens usually were not sufficiently intensive or long lasting to change official behaviour, all the more because they were not accompanied by measures designed to address the underlying causes that had given rise to excessive burdens in the first place. Over time, however, several avenues allowing villagers to seek redress became available. First, the legal system established after l979 gradually penetrated into the countryside. Efforts were made to raise villager awareness of relevant laws and regulations and to enable villagers to acquire rudimentary knowledge about their rights and the procedures necessary to bring lawsuits. Some villagers or villager groups filed suit against officials whom they claimed had violated laws and regulations by overtaxing them. But such suits were rarely successful, since judges were locally appointed and hence likely to side with the local authorities. A second potential source of redress was the right to petition the authorities under the country’s ‘letters-and-visits’ system. At each level of the administrative hierarchy, letters-and-visits offices had long been established. Aggrieved citizens could send petitions or lodge complaints by mail, in person or, despite some restrictions, in groups. Petitioners sought to bring their grievances to the attention of officials at higher levels, including, if possible, Beijing. The record of the letters-and-visits system in actually resolving complaints, however, was not impressive. Officials accepted the petitions but often simply referred the complaint back to the authorities against whom it was brought. Access to media was a third possibility. Since the centre sympathised with villagers’ grievances against taxes and fees, national newspapers and journals publicised their plight. This was a form of pressure on local authorities that they found very unwelcome. In one case in Jiangxi, a peasant ruined by ruthless exactions practised by his township Party Secretary telephoned a TV programme that exposed official misconduct, Focus of Coverage, to publicise his case. As the press, TV, fax machines and e-mail, cell phones and even the Internet reached remote corners of
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rural China, villagers could use information previously withheld by local officials. Fourth, the introduction of village elections from the late l980s on also offered the prospect of empowering villagers. Village democracy entailed the direct, secret and competitive election of the village head and the village council as well as the establishment of an assembly. By 2004, about two-thirds of China’s 700,000 villages had held elections more or less in compliance with the rules of secrecy, freedom of nomination and competition.13 However, township officials had a vital interest in the elections since state assignments had to be implemented through village leaders (Li Lianjiang 2002). From the township perspective, obedient village cadres were a necessity, especially when it came to the collection of taxes. Changing control relations was not, therefore, easily accomplished and continued to be a major obstacle to village autonomy and real democracy. Townships often preferred to deal with the village Party Secretaries who were appointed by the township Party committees, rather than with the elected leaders. This created conflict with the leaders who enjoyed electoral legitimacy (Guo Zhenglin with Bernstein 2004). In response, the Organisation Department of the Communist Party called for Party Secretaries to run for elected office. If they did not win, they would then be replaced by someone who could. The consequences of this for local democratisation are not yet clear.14 Related to this, the 1998 law on elections and village autonomy demands transparent conduct of village affairs, particularly finances. Village committees are to inform their constituents of expenditures and allow ordinary villagers to check accounts. The goal is to end the endemic suspicion of ordinary villagers that cadres were corruptly misusing funds. However, the law conferred only limited financial authority on the villages. Village committees and village assemblies, for instance, cannot decide on the size of the township or the village levy. But they can decide on the method of collection for both and the uses to which the village levy can be put, especially with regard to paying village cadres. The village authorities also can decide the use of income from collectively owned property and on fundraising for schools and roads (FZRB 5 November 1998). But since most of the burdens are imposed by higher levels of 13 14
Informal communication from Professor Tianjian Shi who conducted a nationwide rural survey in 2004. Some evidence shows that successful elections prompt villagers to demand that their leaders intercede with township officials (Li Lianjiang 2003). One of the authors, Thomas Bernstein, witnessed elections in two villages in Jilin Province in June 2004, finding that such demands were indeed voiced during the short campaign speeches that candidates were allowed to make.
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authority, especially the townships, elected village leaders cannot reduce them unless they manage to exert pressure on township or county officials on behalf of their constituents. Overall, fair elections probably do raise villagers’ trust in their own cadres, who can be expected to be fairer in allocating burdens among their constituents. The elections are thus part of a gradual process in which villagers are converted into citizens entitled to have a voice in the management of their affairs (see Li Lianjiang 2004). Unless the elections are expanded and the power of village committees broadened, their role is too limited. Thus, despite the availability of some institutions designed to offer opportunities to secure redress, the reality is that such redress rarely occurs. The evidence lies in the increasing rate of rural disturbances. 4.6.1
A new deal for China’s peasants?
In late 2002, the central leadership of Party and state changed hands. This led to striking adjustments in policy. The new leaders, Party General Secretary Hu Jintao and Premier Wen Jiabao, called for the accumulated problems of the countryside to be addressed systematically. A series of policy adjustments signified recognition that exploiting the peasantry for industrialisation was no longer necessary: ‘In the past, the state took much from the countryside; now, it should give more and take less’ (Ma Hong and Mengkui Wang 2003: 533). Party leaders suggested that methods to subsidise agriculture and farmers should be explored, credit should be expanded, national income distribution and expenditures should be adjusted, and they pledged that ‘any additional appropriations for education, health care, culture and so on each year shall be mainly channelled to rural areas’ (Xinhua 8 January 2003). With regard to financial burdens, already in 2000 a new policy of turning ‘fees into taxes’ had been introduced on an experimental basis. The goal was to replace chaotic fees and multiple levies with a few standardised and stable taxes so as to ensure predictability and set limits on extraction. Wen Jiabao, the future premier, characterised this reform as ‘a radical measure for genuinely reducing peasants’ burdens . . . and maintaining stability in the rural areas’. Wen laid down several principles to be followed. Lightening burdens was the first priority. In addition, the feeand-tax reform had to be tied to organisational reform, especially the downsizing of the bloated township bureaucracies, and also to reform in the funding of rural education. Wen demanded that unrealistic targetsetting activities be stopped. If implemented, this would allow national programmes to be adapted to local conditions. This was top-level recognition that a fundamental change in the incentive structure of local
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officials was necessary. Wen labelled the reform as equivalent in impact to land reform in the early l950s and decollectivisation in the early l980s. The government pressed hard for compliance (Xinhua 14 April 2000). Much to the delight of taxpayers of Anhui Province, where it was first tested, this reform resulted in a drop in burdens by about 25 per cent. But there was a downside: the opening of a substantial revenue gap, which jeopardised the functioning of township and village governments. According to a ten-village study, the fee-into-tax reform resulted in an average 62 per cent decrease in village revenue (Zhu Baoping 2001: 12–16). Ending fee collection sharply reduced the locally raised funds on which village schools had long depended and led to big increases in tuition fees. This demonstrated clearly that burden reduction could not be realistically achieved without an infusion of new funds. In March 2001, the centre publicly recognised that subventions were necessary if the fee-into-tax policy was to work. Premier Zhu Rongji announced that the central government would annually transfer about 20–30 billion yuan to local governments to offset the expected budgetary shortfalls. The decision to implement transfers from the centre was followed by another dramatic announcement: most agricultural taxes would be phased out. For millennia the agricultural tax had been the foundation of the state. Abolition was an enormous symbolic step. The initial fiveyear phase-out plan was accelerated so that some agricultural taxes would end in 2006. This would not actually cost the state very much: in l950 the agricultural tax provided 40 per cent of the nation’s revenue; in 2004, it amounted to less than 1 per cent (Ershiyi Shiji Jingji Daobao 23 February 2005). Large central subsidies did begin to flow to the countryside as taxes were reduced. Between 2002 and 2004, funds earmarked to replace rural taxes and fees rose from 24.5 billion yuan (US$3 billon) to nearly 40 billion yuan (US$4.9 billion). The central government announced that it would be responsible for funding the non-tuition costs of the policy of universalisation of nine years of education in the rural areas, ending a contentious source of fundraising and arbitrary fees (China Daily 20 September 2003; RMRB Overseas ed. 11 October 2003; RMRB 24 October 2003). 4.6.2
Conclusion: unresolved questions and new challenges
Before concluding that the Chinese state has successfully solved a very serious, long-standing problem in its relations with the peasants, several points need to be considered. First, can the allocations be sustained? Economist Christine Wong found that appropriations for tax and fee
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offsets for 2002–4 grew from 0.5 per cent to 4.2 per cent of all central state transfers, the vast bulk of which went to the urban sector.15 This suggests that it should not be difficult for the state to keep these relatively modest subventions to rural areas going. Second, the effectiveness of the new financial flows hinges on whether a drastic downsizing of rural bureaucracies can actually be achieved, especially at the township level. This is an essential task but difficult to achieve in practice, even when township administrations are merged. Many bureaucratic agencies, including the political ones of the Communist Party, Youth League and Women’s Federation, resist reducing the number of their own functionaries. There is also fear that redundant local officials might retaliate by leading protests, thus aggravating the already volatile state of the countryside. For a discussion of the problems of downsizing, see Burns (2003). The problem of overstaffing is compounded by the chronic, severe indebtedness of townships and villages. Many officials have suggested that these debts be written off, especially those that resulted from implementation of central programmes such as that of universalising nine years of school and for which even burdening peasants had not sufficed (Nanfang Dushibao 16 March 2005).16 The crisis of funding rural governments together with the difficulties raised by overstaffing have ignited a debate on the future of township governments. Some argue that they should be dissolved and their functions absorbed by the counties and by expanded self-government. Others contend that townships should be retained but that market forces can free them from major tasks of economic administration.17 Third is the question of whether the funds will actually reach their destinations. A recent World Bank study (2002a) pointed out that budgetary and financial management systems in China are riddled with problems. ‘Leakage’ is especially pervasive at the lowest levels of the hierarchy (Xu Yong 2003). The new policy of sending subsidies directly to grain growers is implicit recognition that local administrations cannot be trusted to handle such payments. The end of the tax-and-fee system will thus require very complex and difficult institutional reforms in financial control systems.
15
16 17
Most central transfers go to subsidising wages and the urban unemployed. See Christine Wong, ‘Can China Change Development Paradigm for the 21st Century?’ unpublished paper (2005). This is a report on a lengthy investigation on the impact of ending taxation. See www.finance.sina.com.cn (23 February 2005).
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The high costs of transition constituted a fourth problem. Taxes and fees were reduced or ended altogether. But as of 2005 central funds had not yet filled the financing gap for many village and township governments, some of which were on the verge of declaring bankruptcy, and unable to repair roads, pay cadres or perform basic government functions (see Nanfang Dushibao 16 March 2005). Finally, what will be the long-term impact of ending agricultural taxation on villagers’ consciousness as citizens? When citizens fulfil their duties as taxpayers, they have a right to make claims on the state for provision of public goods and public services. During the long period when heavy financial burdens oppressed them, villagers developed a consciousness of their rights, as taxpayers, to refuse to pay illegal exactions. One by-product of the tax-and-fee system was that villagers began to view themselves as citizens. Will the end of taxation not sever the ties of reciprocity between state and citizens, reducing peasants to the status of passive subjects dependent on the state’s benevolence?18 Concretely, this becomes a question of village governance. Assuming that it is unlikely that the state will or can ever pay for all village-level public goods, how shall these be funded? Should village autonomy now be greatly expanded, enabling villagers independently to decide on programmes and on the necessary self-taxation? The fee-into-tax reformers envisaged that the village assembly would discuss and approve expenditures ‘item by item’. Hence, some observers have raised the question of whether peasants are capable of governing themselves and overcoming the free-rider problem. Even when most villagers agreed to allocate money for a project such as road repair, some peasants would refuse to contribute (see the discussion in He Xuefeng 2003). In sum, the tax and fee reform, especially the decision to abolish agricultural taxes, was an enormous boon to farmers, but left major aspects of local rural governance unresolved.
18
See, for example, ‘Nongye shui quxiao hou, nongmin guojia yishi jiti guannian ye xiaoshi?’ (Will the abolition of the agricultural tax also lead to loss of peasants’ state consciousness and collective outlook?), Liaowang Dongfang Zhoukan (Eastern Observer Weekly), at http://net.sohu.com/20050228/n224461388.html (accessed 28 May 2007).
5
Mass taxation and state–society relations in East Africa Odd-Helge Fjeldstad and Ole Therkildsen
5.1
Introduction
In East Africa, as in many other agrarian societies in the recent past, most people experience direct taxation mainly in the form of poll taxes levied by local governments. Poll taxes vary in detail but characteristically are levied on every adult male at the same rate, with little or no adjustment for differences in individual incomes or circumstances. In East Africa and elsewhere in sub-Saharan Africa, poll taxes have been the dominant source of revenue for local governments, although their financial importance has tended to diminish over time. They have their origins in the colonial era, when at first they were effectively an alternative to forced labour. Poll taxes have been a source of tension and conflict between state authorities and rural people from the colonial period until today, and a catalyst for many rural rebellions. This chapter has two main purposes. The first, pursued through a history of poll taxes in Tanzania and Uganda, is to explain how they have affected state–society relations and why it has taken so long to abolish them. The broad point here is that, insofar as poll taxes have contributed to democratisation, this is not through revenue bargaining, in which the state provides representation for taxpayers in exchange for tax revenues (Levi 1988; Moore 1998; Tilly 1992; and Moore in this volume). Instead, in East Africa poll taxes have mobilised rural people politically to combat a practice that they have experienced as repressive. The recent introduction of competitive political systems has turned the coercive collection of poll taxes into a national political issue. People use This chapter was prepared with financial support from Chr. Michelsen Institute (CMI), the Danish Institute for International Studies (DIIS), the Danish International Development Agency (DANIDA) and the Norwegian Agency for Development Cooperation (NORAD). Earlier versions of the chapter were presented at the Africa–Europe Group for Interdisciplinary Studies (AEGIS) conference, London (July 2005), the African Studies Association (ASA) Annual Meeting, Washington DC (Nov. 2005), and at REPOA’s Annual Workshop, Dar es Salaam (April 2005). We are grateful to the workshop participants and to Deborah Bra¨utigam and Mick Moore for constructive comments on earlier drafts.
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their voting power to get rid of them. To this extent, the Tanzanian and Ugandan stories are essentially the same and are very similar to the experiences of contemporary rural China (see Bernstein and Lu¨ 2003, and their chapter in this volume). In both cases, the resentments caused by coercive local taxation have led central governments to abolish it. Our second main purpose is to explore the dynamics of coercive local taxation by making comparisons between districts within each of the two countries. The evidence suggests that the local political balance between elected politicians and appointed bureaucrats is an important variable: coercive tax enforcement is most likely when administrators have more power over tax collection relative to elected councillors. Further, the presence of foreign donor agencies that make grants to local governments conditional on matching funds raised by the local authority seems to strengthen the hand of the bureaucrats, and intensify the practice of coercive revenue raising. The chapter begins with a short introduction to poll taxes in Africa. The following section traces the rise and fall of poll taxes in Tanzania and Uganda from the time they were introduced more than a hundred years ago until their recent abolition. We then describe and explain interdistrict variations in poll tax collection in the two countries. The final section concludes with some remarks on the impact on local taxation of emerging competitive political systems. 5.2
Poll taxes in Africa
In Britain poll (or ‘head’) taxes can be traced at least to 1377, when a fixed sum per head was charged (Pepper 1969). In Africa, the British introduced poll taxes in the nineteenth century (Ghana) and early in the twentieth century (Eastern Nigeria, Kenya, Nyasaland, Northern Rhodesia, Sierra Leone, Tanganyika and Uganda). The purposes of these taxes have changed over the years but included at various times combinations of the following: Forcing subsistence-based peasantries to sell their labour and/or to produce cash crops for export during the early colonial period. Contributing to the financing of British war efforts, especially during the Second World War. Contributing to making the colonies self-financing, and to reducing reliance on customs duties, the other prime source of colonial revenues. Financing development activities and the running costs of public administration. The special features of poll taxes, which help to explain their importance for state–society relations in Africa, are best demonstrated by
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comparing them to income taxes. In principle, a poll tax involves a uniform charge on all individuals within a large population category, typically able-bodied adult males (Pepper 1969).1 Millions of people are liable to pay. By contrast, income taxes are levied on the relatively few people who enjoy comparatively substantial salaries or business incomes in the public and the private formal sectors of the economy. Furthermore, while the majority of income taxpayers typically live in or around the commercial capital, poll taxes are collected throughout the country from people with very different incomes and relations to agents of the state. A poll tax has the merit of conceptual simplicity but the disadvantages of inequity and collection difficulties (Pepper 1969: 4). It is blind to actual income differentials and household circumstances. For although there are exemptions for the very poor and the elderly, and in some cases, such as Uganda, the tax is modestly graduated according to assessed income, these provisions have limited effect on actual tax incidence because of the coercive ways in which the tax is enforced.2 Poll taxes are inequitable and regressive, and are perceived as unfair by citizens. There is often widespread unwillingness to pay. Non-compliance is a serious problem. Three other factors tend to reinforce the discriminatory and arbitrary features of poll taxes. First, incomes and ‘ability to pay’ are notoriously difficult to assess in peasant economies, which are commonly dependent on rain-fed agriculture. Incomes may be very variable over time and location. Second, local political pressure and conflict may obstruct tax collection and influence who actually has to pay. Third, it is often fairly accidental who actually pays because the administrative effectiveness in collecting the poll tax is generally low and variable across local jurisdictions. Collection typically involves the use of force in direct encounters between the taxpayer and tax collectors. The latter are sometimes accompanied by armed militia and may search for potential taxpayers at road blocks or in public places (hospitals, schools, markets, sports grounds, at weddings, etc.). These collection techniques – and the ways in which they discourage rural people from travelling – have led to resentment and subterfuge since poll taxes were introduced more than a hundred years
1 2
In East Africa, women with independent means of income from salaries or business must also pay. They are few in number. Certain exemptions are often written into the Acts. The army, police and prisons staff are typically exempted. So are people who are under the age of eighteen, full-time students, ill, destitute or otherwise unable to pay. However, according to Due (1963: 7), the number of otherwise eligible taxpayers exempted on this basis ‘would rarely exceed 5 per cent of the total number of taxpayers’.
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ago. For these reasons, the political and social impacts of the poll tax are substantially greater than its yield in terms of revenue may indicate. 5.3
The rise and fall of poll taxes in East Africa
Tanzania and Uganda are in many ways very different politically, socially and economically. Their experiences with the poll tax, from its introduction about a century ago to recent total abolition, are, however, very similar. 5.3.1
Tanzania
Political stability has been a central feature of Tanzania since the country was established in 1964.3 This can be attributed to several factors. First, there exist no clearly defined ethnic groups of sufficient size, power and cultural homogeneity to create a demand for federalism or secessionism. The largest ethnic group, and the most likely candidate for special status, the Sukuma, live south and east of Lake Victoria and comprise around 20 per cent of the country’s population. However, they have long been divided among dispersed chiefdoms and have never raised serious demands for local autonomy (Kelsall 2000). There are more than 120 other ethnic groups, but they are relatively small and do not control the access to natural resources that may form the material basis for regional political power. Second, there was no devolution of political authority by the British colonial power to regional groupings as seen, for instance, in Nigeria and Uganda. Instead, a system of provincial administration and Native Authorities was established (Tordoff 1965). The Native Authorities – each containing within its boundaries a dominant ethnic group (Dryden 1968: 6) – were composed of traditional leaders (chiefs) and were vested with some executive, legislative and judicial powers under the ‘Indirect Rule System’ (Iliffe 1979; URT 1991). They were not empowered, however, to collect taxes for their own use. Instead they collected taxes as agents of the central government (Bukurura 1991: 76). This was in accordance with British policy, which required the colonies and protectorate administration to be self-financing (Katalikawe 1988: 179). Third, after independence a main challenge for the new central government was to secure internal cohesion in the country: nation-building. The 3
The former British colony of Tanganyika got its independence in December 1961. The United Republic of Tanzania was established in 1964. It comprised mainland Tanganyika and the former British island protectorate of Zanzibar.
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dominant party, the Tanganyika African National Union (TANU), became the main agent of the nation-building process.4 During the independence struggle TANU had gained legitimacy, while traditional leaders (chiefs) had become identified in the public mind with the colonial oppression in taxation and enforcement of ‘modern’ agricultural practices. Hence, in 1962, the Native Authorities with their traditional rulers were abolished (Dryden 1968: 117). The position of individual national leaders in the party and government at the central and regional levels were shaped by their education, administrative competence and, particularly, loyalty to the centre (Kelsall 2000). In addition to their official salaries, senior politicians and civil servants either ran or sat on the boards of parastatal enterprises and cooperatives, thereby securing substantial extra income for themselves.5 In this way, members of the most educated stratum of Tanzanian society invested their loyalties in – and were rewarded by – the centre. They saw their role as mobilising the backward rural areas in the interests of national development. They had no interest in mobilising rural demands or in leading rural areas in opposition to the centre. However, even in the early years after independence there were manifestations of a growing divide between the TANU leaders and the bureaucracy on the one hand, and the social base of the nationalist movement, poor peasants and workers, on the other (Havnevik 1993: 40–1). Although it had the ability to avert peasant unrest, the Tanzanian state lacked the bureaucratic capacity to exert full disciplinary surveillance over peasants. Hence, peasants were able to evade the state, using their ‘exit’ rather than their ‘voice’ option (Hyden 1980). They could shift into new locations and economic activities and hide from the tax collectors. Since the 1980s, the Tanzanian state has been under increasing political and financial stress. The search for new sources of government income is manifested in struggles for control of donor aid funds and of non-state institutions, including church societies, non-governmental organisations (NGOs) and cooperatives, many of which receive donor funding. Control over these resources tends to be dominated by local elites with links to nationally influential kin and in some cases foreign donors (Kelsall 2000: 550). Moreover, the introduction of multi-party
4 5
In 1977, TANU was incorporated into the new ‘revolutionary party’ Chama cha Mapinduzi (CCM). The number of state-owned companies (parastatals) increased from 64 in 1967 to 149 in 1977, and then to 380 in 1981 (Havnevik 1993: 50).
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political competition in 1992 has added an incentive for local politicians to build strong bases of popular support.6 Poll taxes over time in Tanzania The colonial history of Tanzania dates from 1885 when Chancellor Otto von Bismarck decided to create a German colony in East Africa.7 In the late 1890s, the German colonial administration imposed an annual head tax of three rupees on all adult males (Spear 1997: 84). This was equivalent to more than a month’s wages, and was designed to force Africans out of the domestic economy to work for wages for the government and private German and South African settlers. The British took over Tanganyika after the First World War and continued German colonial policies regarding labour and taxes (ibid. 112). The Hut and Poll Tax Ordinance was issued in 1923. Officially, taxes were justified in terms of the need to recover the costs of the colonial public administration (Havnevik 1993: 211). But the poll tax was also used quite actively to create regions of ‘labour reserves’ (ibid.), and ‘to flush out’ labour when most needed by employers (Shivji 1979: 4). In the 1920s, the hut and poll tax rates were equivalent to one or two months’ wages at prevailing wage rates (Spear 1997: 113). In 1945, the tax levy in Rufiji District represented 25 per cent of the gross income per taxpayer (Havnevik 1993: 212). Tax defaulters were required to labour on public works, including grass clearing along roads and serving as porters for safaris. As late as 1950, compulsory labour amounted to an average of ten days per person per year in some regions (Spear 1997: 113). Until the early 1950s, most of the hut and poll tax revenues went into the central treasury to pay for the colonial administration (Due 1963). In 1948, for instance, they contributed almost 15 per cent of total domestic revenues, while income taxes contributed less than 10 per cent (IBRD 1961: 49, Table 7). Ten years later the poll tax, then labelled the ‘personal tax’, contributed less than 7 per cent of total central government domestic revenues, while income taxes had become one of the major revenue sources and contributed about 18 per cent of central government revenues. In this period, very few Africans paid income tax (ibid. 327). At the same time, the poll tax became an increasingly important revenue 6 7
The first multi-party local government election was held in 1994, followed by the parliamentary election in 1995. From 1885 to 1890 the German East Africa Company was responsible for administering the territory then known as German East Africa (Iliffe 1979: 88). From 1891 this responsibility was taken over by the German state. However, it took more than a decade until German rule was consolidated. It was ended abruptly by the First World War. In 1920, mainland Tanganyika became part of the British Empire (ibid. 247). In 1922, Britain was given full powers of legislation and administration in the territory.
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source for local authorities. In 1961–2, the personal (poll) tax yielded 83 per cent of local tax revenues (Due 1963: 64). Initially the poll tax was imposed at a uniform rate. However, the obvious deficiencies in terms of both revenue yield and equity concerns led to a steady introduction of graduation from 1953. Although the central government encouraged the use of graduated rates, the flat-rate system remained almost universal in district councils until the 1960s. The rate could, however, vary substantially across councils (Due 1963: 65). In 1969, the government abolished the poll tax. This was partly in response to public opposition to the harsh methods of tax collection used by local authorities. In particular, there was public outrage at the death of thirteen people in Ilemera (Mwanza Region) who suffocated in a prison cell overcrowded with arrested poll tax defaulters (Bukurura 1991: 79). Moreover, the association with colonial practices of coercive enforcement methods was put forward as an argument in favour of abolishing the local poll tax (Kulaba 1989: 219). But there was also a more political motive. By the late 1960s, the central government, led by President Julius Nyerere, was concerned that, at the local level, TANU and the cooperatives had become vehicles not for achieving socialism, but for pursuing personal gain. Rural elites were overtly stigmatised as ‘kulaks’ (agrarian capitalists), ‘ticks’ and ‘bloodsuckers’ (Kelsall 2000: 548). The abolition of the poll tax not only removed an important revenue source for local officials, but also laid the foundation for the disbanding of rural local authorities in 1972 and of urban councils one year later.8 Hyden (1980) saw this as an attempt by the centre to bypass rural elites, and to ‘get at’ the peasantry directly. It left the central government with control over development activities down to the grassroots levels. The local government system was reintroduced in 1982 and the poll tax two years later. The new poll tax was renamed the ‘development levy’ to make it more acceptable to the general public. The proposal caused uproar in the Parliament (Bukurura 1991: 80). The act was passed by a narrow margin of only two votes (Africa Research Bulletin 1982: 6525). The poll tax (‘development levy’) again became the most important source of revenue for local authorities. In 1984–5 it generated over 60 per cent of the total local revenues in rural councils and about 50 per cent in urban councils (URT 1991). However, twelve years later, in 1997, revenues from the poll tax had declined to about 30 per cent of total local revenues in a sample of forty-two rural councils, and 19 per cent on 8
Rural development featured particularly high on the government’s agenda in the period 1972–80. Ujamaa, or villagisation, was a key component for the ‘modernisation’ of the rural areas (Havnevik 1993).
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average in ten urban councils (Price Waterhouse 1998). Thereafter, until 2003, the contribution of the development levy to rural councils’ revenue remained fairly constant. There has been a substantial decline in its importance in urban councils since they have been able to tap alternative revenue sources. The fall in revenues from the poll tax between the 1980s and the 1990s can be largely attributed to the controversial and fiercely debated 1991 parliamentary decision to exempt women from paying (Tripp 1997: 157). Supporters of levying the poll tax on women argued that they were equal to men according to the law, and thus had the same rights and obligations as men. Opponents argued that women in rural areas should be exempted because they were economically dependent on men. The debate revealed a conflict between women in different income groups: female Members of Parliament, representing wealthier groups, firmly opposed exempting women. In June 2003, the government abolished the poll tax without prior consultation with Parliament, local authorities or the ministry responsible for local authorities. The decision took many by surprise, since the tax was the major local revenue source for the majority of rural councils. The government, aware that competitive elections were due in 2005, was able to deprive the political opposition of an issue on which it was likely to gain support. 5.3.2
Uganda
Fragility is one of the distinguishing features of the Ugandan state. This has been the situation since long before independence in 1962. Thus, it took the British colonial rulers over thirty years just to define the boundaries of the Uganda protectorate. For example, Karamoja in the northeast of Uganda had no civil administration until the early 1920s. Rudolph province, also in the north, was transferred to Kenya in 1926 when the colonial regime finally realised that its administration within Uganda was impossible. And during the Second World War, Uganda’s boundaries were called into question again by proposals that it should be merged into a larger entity centred on Kenya. Uganda remains fragile. After the upheavals of the Obote and Amin periods (1972–86), the rule of Yoweri Museveni and the National Resistance Movement (NRM) began in 1986. This was the first time in Africa that a group had formed its own army in the bush and seized power. ‘It was a literal instance of the hinterland striking back’, as Herbst (2000: 254) puts it. But the new regime has not managed to control the north of the country. Bloody conflicts with insurgents
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continue and more than 1 million people are displaced at present (International Crisis Group 2004). The relations of the traditionally separate Buganda Kingdom with the holders of state power have also remained a continuous source of tension and conflict (Englebrecht 2002). During the colonial period Buganda enjoyed preferential treatment, which it has since tried to maintain. When relatively neglected areas sought redress for colonial marginalisation after independence, Buganda was central to their claims. Its demand for autonomy was increasingly echoed by the smaller kingdoms in the west and by the large Busoga District in the east (Davey 1974: 21). During the upheavals of the Obote and Amin regimes, the Kingdom’s political privileges were reduced. The devolution of power implemented by the NRM regime has been a strategy for consolidating central power over key national issues while at the same time allowing district authorities relative autonomy. It has also enabled the regime to manipulate and fragment ethnic claims, and to head off until 2005 demands for a multi-party electoral system. Uganda’s devolution is therefore both intended to accommodate ethnic nationalisms (Therkildsen 2002b) and to undermine and fragment them (Crook 2002). This is the larger context in which the politics of poll tax in Uganda must be understood. It is one in which neither the colonial power nor post-independence regimes have been hegemonic. Coercion may be applied in tax collection, especially against the poorer poll taxpayers, but there is limited political and administrative capacity to sustain its consistent use for long periods or across the whole country. And the poll tax, although a ‘local’ tax, has always been intensely intertwined with national political issues, as the following discussion will show. Poll taxes over time in Uganda Financial self-sufficiency of the colony was the prime objective of poll taxes until the Second World War. As in Tanzania, taxation was also seen as a way to get rural Africans to enter the monetary economy – at first by compelling them to grow cotton. Taxation started with the hut tax in 1900 followed by the poll tax in 1905. At first, revenues went to the colonial government in Kampala. Non-Africans were not taxed until 1919 when a poll tax for them was introduced. A graduated poll tax for non-Africans was introduced in 1940 followed by income tax in 1945. Native local authorities won their first taxing powers in 1925, when they were allowed to commute compulsory work obligations (known as ‘luwalo’) into cash payments. But proper local government taxation first appeared when the poll tax, renamed the Graduated Personal Tax (GPT), was introduced across all districts between 1954 and 1960 (Davey 1974: 35–8).
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Until the beginning of the Second World War, the government of the Ugandan Protectorate was ‘apprehensive and hesitant’ to levy income tax on non-natives. It was still more ‘reluctant – alarmed, even’ to contemplate an increase in the already heavy poll tax paid by Africans. The governor argued that their spending power was needed to enhance cash crop production (Thompson 2003: 125). Wartime London overruled these local concerns in 1940 and 1941 with instructions to increase direct taxation for all taxpayers (ibid. 117–21). At the same time, local expenditures were not to be increased. The aim was additional tax revenues to fight the Empire’s war elsewhere – an interesting colonial twist on the relationship between tax and warfare that existed in Europe according to Tilly (1992). During the Second World War, about 77,000 Ugandan men enlisted in the British armed forces. Many of them became politically active when they returned. The political consequences were significant: ‘Before 1939, the colonial state was favoured by the modesty of its goals and by the relatively cooperative African societies. The war changed all this’ (Thompson 2003: 5). Relations with the colonial regime became more tense and conflictual thereafter until independence in 1962. In the post-independence years, the ostensible purpose of poll tax has always been to fund ‘development’. Some revenues were actually used for that purpose in the 1960s (Ghai 1966). After Idi Amin took power in 1972, poll taxes soon collapsed, although local mobilisation of resources for public services did not. Indeed, the rate of construction of primaryschool classrooms by grassroots organisations was at its peak during the Amin period, when state-provided services collapsed in most rural areas (Nabuguzi 1995). During the first years of the NRM rule in the late 1980s, local governments were largely dependent on their own revenues to run their affairs. By 2003, poll taxes made up only some 40–50 per cent of locally collected revenues, against 91 per cent in 1961. They were mostly used to cover administrative expenses (Bahiigwa, Ellis, Fjeldstad and Iversen 2004). Such expenditures may be necessary, but they imply that in the popular perception poll tax payment is no longer directly linked to development activities. This fits well with the facts. Poll tax revenues have been too small to cover the investment and recurrent costs of the expansion of service provision that took place in the 1990s. These expenditures were funded by central government and aid donors. It is also instructive to look at the broader trend in tax burdens for the twentieth century as a whole. Over this period, the most significant change in Uganda’s system of direct taxation was the abolition, after independence, of discrimination based on race. This discrimination had meant that not only were colonial Africans subjected to different types and rates of taxes from those imposed on non-Africans, notably their
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liability for the poll tax, but their tax burdens were also different (Jamal 1978: 428). African cash incomes were taxed at 23 per cent in 1927 and an astonishing 55 per cent in 1947.9 Non-Africans were taxed much more lightly relative to their cash income. One discriminatory colonial legacy has, however, remained: while it is a civil offence to default on income tax, defaulting on poll taxes continues to be a criminal offence.10 Colonial discrimination by race has in effect been replaced by discrimination by class (Therkildsen 2004b). Since independence, the importance of poll tax for revenue generation has declined substantially.11 Income tax collections amounted to around 3.2 per cent of GDP at independence, while the poll tax yield stood at 2.5 per cent. Forty years later these percentages were 1.2 and 0.8, respectively.12 However, compared to personal income tax, poll tax remains a mass tax. In 1961, fewer than 10,000 people paid income tax against some 1.4 million poll taxpayers out of a total population of around 7 million. In the mid 1990s, the number of income taxpayers had risen to some 185,000 individuals and firms. The number of poll taxpayers had fallen to around 1.2 million in a total population of around 19 million. By the time it was abolished in 2005, around 10 per cent of the total population paid poll tax compared to only 1 per cent paying income tax. Herein lies a major reason for the political importance of poll tax. Numerous policy documents and consultants’ reports on the local government tax system routinely single out the declining poll tax yield in the 1990s as a major problem (ODA 1996;13 LGFC 2002; Bahiigwa et al. 2004). Uganda’s decentralisation reform has amplified the problem as substantial transfers of functions and funds to local governments have taken place in the 1990s. As a result, local governments are now very dependent on central government grants and donor funds. These two sources of revenues accounted for between 50 per cent (Kampala) to 85 per cent (Gulu, Northern Region) of total local government revenues in the mid 1990s (Livingstone and Charlton 2001: Table 1). In 1999–2000, local poll tax made up less than 6 per cent of the total local government
9
10 11 12 13
These figures cover all taxes including the effects of marketing board deductions, export taxes, etc. A cotton-producer in Buganda, for example, with an annual income of Sh 60 (East African Shillings) had to pay Sh15 in poll tax, Sh10 in native government tax and a Sh10 tribute to the landlord (Thompson 2003: 127). The same is the case for Tanzania. The figures in this section are from Therkildsen (2004c). GDP per capita in 1961 and 2000 are approximately at the same level (Bigsten and Kayizza-Mugerwa 1999). ODA, ‘Uganda: Enhancing District Revenue Generation And Administration’. Unpublished paper. London: Overseas Development Administration (1966).
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revenue budget (Bahiigwa et al. 2004). Thereafter, until it was abolished by July 2005, revenues from the poll tax dropped even further. 5.4
The dynamics of coercive taxation in East Africa
In both Tanzania and Uganda, the poll tax is about a hundred years old. It tended to become more important as a revenue source during the first sixty to seventy years of its existence, and then declined in the postindependence period. While the historical trajectories of poll taxation in the two countries are similar, there have always been spatial variations within each country, at any moment in time, in the degree of taxpayer compliance. These have tended to increase after independence. 5.4.1
Tanzania
The poll tax was greatly detested by the African population during the colonial period. Defaulters were commonly caught in roadblocks. Here tax inspectors could stop people, demand tax receipts and take them to the local tax office if they could not produce one (Due 1963: 78). This was often a time-consuming and administratively costly exercise, as reflected in the Annual Report for Rufiji District of 1935: ‘Tax has been mentioned in almost every paragraph of this report. It is a regrettable fact that the Native Administration is entirely dominated by this question. The time of Administrative officers, which should be devoted to better causes, is largely monopolised by the necessity of re-inforcing the effort of the native collectors’ (Havnevik 1993: 211). Defaulters were forced to supply labour on public works, and could also be gaoled, although imprisonment was uncommon in the 1950s and considered politically infeasible just after independence (Due 1963). However, imprisonment became widespread during the 1960s, as reflected in the case from Mwanza mentioned above. This contributed to the subsequent abolition of the poll tax in 1969. After its reintroduction in 1984, brutal methods of enforcement, including the imprisonment of defaulters, were legal and used in many councils.14 Poll tax resistance became widespread across the country. Taxpayers saw few tangible benefits in return for the taxes they paid. Councils sponsored almost no 14
The Local Government Finances Act 1982 (URT 1982: 21) states that ‘Any person who neglects, fails refuses to pay any rate payable by him to a local government authority under this act, commits an offence and is liable on conviction to a fine not exceeding fifty thousand shillings or to imprisonment for a term not exceeding three months unless he proves that the apparent neglect, or failure was due to provable circumstances beyond his control.’
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development investments, and because they lacked operating funds, local authorities could not even maintain the existing public goods (Semboja and Therkildsen 1992). The deterioration and, in some cases, the near non-existence of government services promoted tax resistance (Bukurura 1991; Tripp 1997). Many local governments relied heavily on simple physical coercion to collect the poll tax, including roadblocks manned by the local militia or police and village-by-village invasions by collectors (Fjeldstad and Semboja 2001). The use of coercion was so pronounced and detested that people went to extremes to evade the tax, often hiding in the bush when collectors approached. Resistance sometimes took more violent forms. Fjeldstad (2001), for instance, reports that in the Kilosa District Council area, collectors avoided some villages owing to the high personal risks involved. Certain villages were visited only when the local militia accompanied collectors to protect them. Cases of tax revolts were also reported from councils in other regions. The Daily News (28 November 1997: 5) reports that ‘[o]ver twenty Moshi Municipal Council workers who were on a special operation to net development levy defaulters were attacked by a mob at Mbuyuni Market on Wednesday afternoon and eight of them were injured, some seriously’. The revolt in Arumeru District in north-east Tanzania in 1998 involved the refusal of almost the entire district population to pay the poll tax, the beating up of council collectors, the burning of the council chairman’s house and his subsequent resignation (Kelsall 2000). Taxpayers and councillors complained bitterly about harassment and abusive collection. In the Budget Speech for 2002–3, the central government issued a directive on tax enforcement, instructing local authorities not to use roadblocks or the local militia as instruments for tax collection. This led to an immediate drop in revenues in some councils (URT 2003). However, others disregarded the directive. Without the use of force, they argued, it would be very difficult to make people pay. This is part of the reason for large differences in poll tax collections among district councils. In 2002, for example, the poll tax (‘development levy’) represented more than 56 per cent of Iringa District Council’s own revenues, compared to 11 per cent in Moshi District Council and only 4.5 per cent in Bagamoyo (Fjeldstad et al. 2004). Such differences between councils had, however, been quite common in the past. For instance, in 1995 the development levy varied from 3 per cent of total own revenues in Kilwa District Council to 64 per cent in Singida (Fjeldstad and Semboja 2000). Different economic structures, revenue bases, population densities, incomes per capita, and the level and quality of public services may explain some of these differences. However, substantial variations in
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revenue performance were also observed between councils that apparently had fairly similar socioeconomic characteristics. The Uganda story is similar. 5.4.2
Uganda
Riots in protest against poll taxes have a long history in Uganda. Between the late 1910s and the late 1980s, every tax rebellion was caused by dissatisfaction with the power of the chief – especially his lack of accountability in poll tax matters. This sparked riots in, for example, Bukedi District in 1960 just before independence (Uganda Protectorate 1960), and in Busoga District in 1983. Indeed, the transfer of power from chiefs to politicians in the district administrations, which began in 1955 and gave councils the power to tax (CRC 2003: 106), resulted in instability in some district administrations, especially in eastern Uganda.15 Discriminatory over- and under-assessments of the graduated poll tax (GPT) were both common (Davey 1974: 36; GoU 1987: 13 and Ch. 7). This was a source of much discontent. Mamdani (1991: 354) argued that a growing peasant rebellion in central Uganda against the second Obote regime was fuelled by a dramatic increase in GPT collection in 1984. It helped to bring the NRM to power in 1986. Riots against local government taxes also took place in Iganga District in 1994 – again in protest against unfair assessment (GoU 1994). There has been no GPT assessment in this district since then (Kjær 2004: 28). Inter-district tax compliance differences were substantial, too. Before independence, in 1958, for example, the percentage of adult males (sixteen years old or above) that paid poll tax (GPT) ranged from 85 per cent in Ankole in the west to 58 per cent in Acholi District (in the north). A decade later payment had declined everywhere, but most dramatically in the eastern part (Bugisu and Busoga districts). These areas were the most closely administered prior to independence, with the colonial government rigorously supervising chiefs and councils so as to reach production and development goals. Clearly, tax payment here depended on colonial effort and coercion. When this stopped, payments dropped significantly. The colonial administration was much less direct and obtrusive in the western districts where deference to chiefly authority may have sustained tax administration after independence. Here poll tax payment declined much less. In the northern districts, where the colonial power never put
15
This is so although Hicks (1961: 211) at the time regarded the poll tax as a ‘distinctly gratifying’ stimulus to local government institutions.
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much effort into tax enforcement anyway, there were also limited declines after independence (Davey 1974: 141–2). Thirty-five years later, in 1993, geographical differences in poll tax payment were even more pronounced. Livingstone and Charlton (1998: Table 6) found that the ratio of taxpayers to the rural male population (aged 20–59) ranged from 96 per cent in Mpigi District (Central Region) to 4 per cent in Kitgum District (Northern Region). The Eastern and Northern regions are below average on this indicator – as they were just before independence. But even in the Central Region, with the highest proportions of taxpayers, there are exceptions. In Rakai District, for example, the ratio was just 29 per cent against a regional average of 76 per cent. People were well aware of such differences. In a major country-wide survey of thirty-six communities conducted by the Ministry of Finance in 1998, one of the major conclusions on GPT was that tax collection was seen as fairer in the 1960s than at the time of survey. Today, the report states, ‘the poor are burdened while the rich are left virtually untouched’. Moreover, many people complain about ‘coercion, threats, and confiscation by collectors’. Bribes then have to be paid to recover confiscated items (UPPA 2000: 111–12). A similar survey in 2002 found that ‘[b]rutal graduated tax collection methods are noted with resentment . . . [by many], and reported to be a reason for unwillingness to pay’ (UPPA 2002: xvi). In fact, the resistance against paying GPT has been substantial. For example, most casual workers in Mwera did ‘not venture beyond the surrounding parishes’ for fear of being arrested for defaulting on graduated tax payments (ibid. 75). It is remarkable that GPT is identified as a much more serious and widespread concern in the 2002 survey than in the earlier one. It illustrates that the poll tax was becoming an increasingly political liability. 5.5
Explaining the patterns observed
It is largely political factors which have driven the rise and fall of poll taxation in Tanzania and Uganda. They have also been an important cause for the wide inter-district variations in compliance – especially after independence. These two trends are, however, intertwined as shown below. 5.5.1
The rise and fall of poll taxes
A main argument in the literature on state formation in Europe is that taxation contributed to political development and democratisation by
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catalysing ‘revenue bargaining’, i.e. a process in which the state exchanged influence over public policy with tax revenues from citizens (Moore 1998; Tilly 1992; and chapters by Gerald Easter and Mick Moore in this volume). The history of poll taxation in Tanzania and Uganda suggests a different interpretation. The case studies show that the emergence of competitive national and presidential elections since the mid 1990s have gradually given citizens (voters) the means to mobilise politically against coercive poll taxes, which were opposed ever since they were introduced by the colonial rulers. Democratisation drives poll tax reform – not the other way round. To explain this reversal of causality requires more detailed explanations of the rise and the fall of poll taxes in the two countries. Poll taxes were resented right from their introduction more than a hundred years ago. Nevertheless, the colonial regimes succeeded in raising substantial funds from this source – especially in the decades preceding independence – owing to three factors. First, a substantial degree of coercion was used to force people to pay. It was certainly not service provisions that explain compliance at that time because the colonial regimes did little in this regard. Second, and equally important, colonial rulers applied coercion fairly consistently. Compliance rates across districts were therefore more uniform (and relatively high) prior to independence than after. This may have encouraged compliance, since people are more likely to be willing to pay taxes when they think others are also paying.16 Third, there were no institutions of meaningful political representation in place during colonial rule, nor were there any strong organisations around which people could be mobilised to resist colonial taxation.17 Tax riots occurred, but they did not have wider political implications for the colonial regime. All three factors changed gradually in the post-independence era. Although the use of coercion in poll tax collection was continued by the new governments, it was not applied as vigorously and consistently as earlier. The much wider differences in compliance rates across districts in the 1990s indicate this, as does the generally falling total revenue collection from poll taxes after independence. Both trends discourage quasi-voluntary compliance without which tax collection becomes both economically and politically costly (Levi 1988).
16 17
As argued by Levi (1999b), taxpayers are ‘contingent consenters’. This is certainly true for Tanzania. The Buganda Kingdom did constitute a strong organisational force in Uganda during colonial rule (and after), but its focus was on autonomy rather than taxation. Other Ugandan kingdoms had similar priorities as shown above.
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This brings us to the issue of political mobilisation. The opportunities for political mobilisation did not improve substantially in the postindependence era because the organisations and movements around which this could occur remained embryonic and weak. Both Tanzania and Uganda were ruled by regimes in which political loyalty and accountability were to the political elites at the centre – not to people or institutions in the districts. Moreover, political representation and mobilisation had no practical meaning in Uganda during the upheavals of the Amin and Obote II periods from 1972 to 1986. Increasing political competition, which began in the 1990s, is now changing this situation in both countries. Gradually, elections are being used to air dissatisfaction with existing politics, and politicians listen – often seeking to take pre-emptive action so as to prevent defeat at the ballot box during local and central government elections. Thus, the introduction of multi-partyism in Tanzania in 1992 has led to more political competition and stronger incentives for local politicians to build strong bases of popular support. Earlier, under the one-party state, a substantial minority of Members of Parliament gained access to Parliament either on tickets of the mass organisations of the party, i.e. Cooperatives, Youth, Women, or as appointees of the president (Kelsall 2000: 550). Hence, it was not uncommon that high-ranking politicians lost local constituency elections but retained their Cabinet positions through presidential appointment. Seats for presidential appointees and youth have been abolished, while there are still reserved seats for women (ibid.). Consequently, aspiring national leaders now need a local political base. National and local issues are also more closely linked and local concerns more salient for national policy. Therefore, nationally oriented leaders see political advantage in allowing the structures of repression at the local level to loosen up, at least temporarily. Given this, it is likely that the motivation behind the government’s move to abolish the poll tax in 2003 was partly to increase its popularity at the grassroots levels ahead of the 2005 elections and partly to neutralise the opposition. Much the same story can be told about Uganda. Following Obote’s rule, Amin’s coup d’e´tat in 1972 and the subsequent fourteen years of unrest in which local taxation basically collapsed, the NRM reintroduced the poll tax (GPT) in the late 1980s. Concerns about GPT soon began to have national political repercussions. This started prior to 1996 when the first competitive presidential election since the military takeover in 1986 was conducted. Local taxation has been an election issue ever since (Therkildsen 2004b). During the 2001 presidential elections, for example, President Museveni’s opponent, Kizza Besigye, campaigned for the abolition of the GPT. Museveni was against this but later promised to
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lower the minimum rate from USh 10,000 to USh 3,000.18 This promise, combined with the clear message from national politicians to local authorities that efforts to collect poll tax should be eased, led to a dramatic drop in revenues. The GPT became in practice a flat-rate tax. Nevertheless, in 2003, when the Constitutional Review Commission toured Uganda it found that ‘almost in every part of the country . . . there was a great outcry about the burden of graduated tax’ (CRC 2003: 125). In July 2005 a large majority of Ugandans voted for the return to multi-party democracy in a national referendum. This result was foreseen. In his budget speech in June 2005, the Minister of Finance simply announced – against the advice of the local government association and the government’s own finance commission – that the GPT would be abolished by 1 July 2005 (GoU 2005: 47). The NRM was clearly preparing for the 2006 presidential, national and local elections and trying to prevent the poll tax from becoming an election issue, as it had been in 2001. In both Tanzania and Uganda, it can be concluded, increasing political competition has raised the political cost of the coercive poll tax system. Likewise, in both countries, the ruling elites recently decided that this cost did not match the limited revenue benefits of poll taxes under the new rules of the political game. 5.5.2
The dynamics of coercive taxation: inter-district compliance differences
In districts where incomes are low, we might expect that a lower proportion of the eligible taxpayers would pay the poll tax, but there is no such clear pattern. We might also expect willingness to pay the poll tax to be influenced by a government’s legitimacy among various groups. Inter-district poll tax compliance rates could therefore reflect ethnically inspired views about the legitimacy of the ruling elites based on their ethnic composition (Barkan and Chege 1989; Lieberman 2002a). In Tanzania, there is some regionally based opposition to the ruling party, especially in Zanzibar and the Kilimanjaro Region. In Uganda there is substantial regional variation in the support and opposition to the NRM rule. The principal line of political cleavage divides the Western Region, from where the NRM had originally ascended to power, and the Northern Region, formerly a stronghold of 18
Museveni argued that the government is like building a house where everyone contributes a brick or labour. Abolishing GPT would therefore promote laziness of some people (Makara and Tukahebwa 2003: 282).
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Obote and his party (Bratton and Lambrecht 2001: 442). The association between such cleavages and tax compliance is, however, not strong. More subtle explanations of inter-district differences in tax compliance must be sought in locally specific circumstances. A main reason is that state elites in both Tanzania and Uganda have simply abandoned local government taxation to local politicians and administrators for a good part of the post-independence period. Whereas central government taxes and tax collection have undergone significant reform in the 1990s in both countries – with strong involvement by the World Bank, the International Monetary Fund and some bilateral donors – it is only during recent years that a local government tax reform has come onto the political agenda. This ‘abandonment’ by the centre, together with the decentralisation reforms since the mid 1980s, means that local authorities have had considerable authority to design their own systems of collecting poll taxes, and to decide on the extent to which they will employ coercion. This seems to explain much of the inter-district compliance variance. In Tanzania, the tax by-law system, limited central government capacity and poor coordination between the central and local governments gave local authorities wide discretion to introduce new local taxes, to set tax rates and to implement collection, subject to ministerial approval. Thus, the poll tax rates varied substantially between councils. In Uganda, there has been more formal central control of poll tax collection principles (centrally issued directives on rates, income categories and so on), but the local authorities have been given substantial room for manoeuvre in implementing them. Both cases illustrate an important point about taxation: ‘tax administration is tax policy’ (Casanegra de Jantscher 1990: 179). Specifically, the effectiveness of poll taxes depended to a large degree on the extent of coercion used to collect dues. In some areas, collection was facilitated through extortive and abusive approaches that were mainly advocated and implemented by council administrators, with minimum support from local politicians (see Fjeldstad (2001) on Tanzania, and Kjær (2004) on Uganda). In other areas, this pressure was lower. Thus, in the absence of democratic forms of accountability, tax collection in some local authorities turned into a licence for collectors on the ground to more or less freely augment the local treasury and supplement their own salaries through extortion from local residents.19 In accordance with 19
Wunsch (1990: 54) argues that in circumstances where national leaders were dogmatic on implementing comprehensive programmes, as Tanzanian leaders were on Ujamaa villagisation during the late 1970s, bureaucrats have been reduced to authoritarian instruments for enforcing compliance.
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Mamdani’s notion (1996: 59) of ‘decentralised despotism’, financial autonomy provided the framework in which lower-level officials could resort to extra-legal enforcement and violence to extort money from the population. Political pressure and conflict may also influence local tax compliance. Local tax collectors generally claim, with substantial justification, that elected councillors obstruct tax collection. The consequence is reduced tax effort. Elected local political leaders are dependent on a popular local base (Kelsall 2000: 550). Accordingly, councillors are in general reluctant to raise local taxes and charges, not only owing to concerns about their popularity, but also because they may be major local landowners or businesspeople who themselves do not wish to pay higher taxes.20 In both countries, poll tax collections generally dropped significantly during election years of the late 1990s and early 2000s, although substantial differences between councils were observed in this respect reflecting differences in the bargaining powers of politicians vis-a`-vis local administrators (Fjeldstad 2001). Moreover, local patronage undoubtedly played an important role in who paid and who did not (Francis and James 2003). Finally, donors may exert strong influence on the behaviour, decisions and actions of local authority administrators and politicians. The presence of donors in a local authority may be crucial in changing the ‘balance of power’ in favour of council administration (Fjeldstad 2001). Generally, donors cooperate with council administrators and staff to implement their activities, usually through the creation of parallel structures. This intervention often increases the influence and power of the bureaucracy at the expense of the political system. Since donors increasingly use revenue generation as an indicator of the performance of the councils they are involved in, this may further empower the administrative cadre. One strategy donors have used in Tanzania to reduce the problems of free-riding by local councils has been to adopt a matching scheme, supplying aid only on the basis of matching funds from the local government’s own revenue mobilisation. According to Catterson and Lindahl (1998: 20), this has ‘created strong incentives for revenue collection’. Furthermore, donor support may cushion council administrators against possible taxpayers’ opposition. However, substantial donor funds for a district may also have the opposite effect if they are not conditional on local
20
Richer districts often have low compliance rates (Livingstone and Charlton 1998: Table 6). In Mbale District, Uganda, for example, coffee is the basis for wealth, but political conflicts are deep and evolve around land issues (Hickey 2003). Such conflicts, which can also be driven by other factors depending on the area in question, are a major cause of perennial administrative and political problems. They contribute to low levels of compliance.
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tax collection. It can undermine tax effort – and hence compliance – as the experiences from Rakai District in Uganda show. The district has received massive Danish funds for fifteen years and recorded in 2004 the lowest percentage of poll taxpayers in the region. 5.6
Concluding remarks
Coercion often seems to be an important feature of taxation of peasant economies. As experiences from contemporary China also indicate (Bernstein and Lu¨, this volume), the financial burdens imposed on the rural population have become a major source of discontent in many poor, smallholder societies and a source of political and social instability. Underlying the issue of peasant tax burdens are the relations between state and society and hence the issue of democracy. The study of poll taxes in Tanzania and Uganda offers a glimpse of the direction in which the democratic reforms in these countries are evolving. Over the last hundred years, there have been remarkable shifts in the collection of poll taxes in both countries. Coercion has become less uniformly used and is driven more by locally specific conditions and practices. Poll taxes were abolished in Tanzania in 2003 and in Uganda in 2005. This was a direct result of increased political competition in local, national and presidential elections. People use their voting power to get rid of an oppressive and highly unpopular tax. It may be argued, as Guyer (1992) does, that this illustrates an unwillingness of an electorate in a democratising African country to vote in favour of taxation. Its preference is for ‘representation without taxation’. But this view does not take adequate account of the way in which poll taxes are actually collected. Collection methods hit many poor people randomly, violently and destructively. The competitive political systems that are now emerging provide people with the means to push politicians to make poll tax changes directly (by lowering rates, or even by abolishing the tax) or indirectly (by encouraging less coercive collection methods). We have seen these processes at work in Uganda and Tanzania. As Adam Smith ([1776] 1999) wrote long ago: ‘in countries where the ease of comfort and security of the inferior ranks of people are little attended to, capitation taxes are very common’. Now the hinterland is striking back. This time it is against an oppressive, regressive and unfair tax.
6
Contingent capacity: export taxation and state-building in Mauritius Deborah A. Bra¨utigam
6.1
Introduction
In development theory and practice, export taxation has a generally bad reputation. Economists point out that export taxes penalise a sector that should be encouraged. The United States has tabled proposals in the World Trade Organisation (WTO) that would force the repeal of export taxes for most countries.1 In natural resource-rich economies, a state’s reliance on revenues from natural resources (whether ‘taxed’ or simply brought into the coffers as ‘rents’) seems to lead to something widely called the ‘resource curse’. High taxes on agricultural exports were one of the major factors identified by Robert Bates (1981: 11–29) in his analysis of the politically rational but economically perverse policies pursued by African rulers. For all of these reasons, export taxes – and in particular, the taxation of agricultural exports – have been on the wane in the developing world (Tanzi and Zee 2000b: 307 n. 24). In many cases, this is no doubt a positive development, although their replacement by taxes such as the Value Added Tax (VAT) has been the source of much political protest. However, a closer look at export taxes reveals a more complex story that
International Development Program, School of International Service, American University, Washington, DC, USA
[email protected]. The research assistance of Preston Winter was much appreciated. Versions of this paper have been presented at the Danish Institute for International Studies, Copenhagen; the Institute of Development Studies, Brighton, UK; Princeton University; University of California San Diego; and the American Political Science Association Annual Meetings, Philadelphia, 2006. Comments from participants are much appreciated. Grateful thanks to those who have read drafts of this paper, especially Odd-Helge Fjeldstad, David Hirschmann, Margaret Levi, James Mahon, Mick Moore and Richard Snyder. 1 Regional trade agreements may require the elimination of export taxes (EU, NAFTA, MERCOSUR, CARICOM, for example). The United States Constitution forbids the imposition of an export tax in the USA. A recent proposal made by the US Department of State included a suggestion that WTO members agree to prohibit ‘export taxes on agricultural products. An exception would be made for developing countries for revenuegenerating purposes under certain conditions’ (US Department of State 2002).
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suggests a surprising conclusion: taxes on agricultural exports have the potential to play a wide variety of positive state-building roles. They may directly reinforce democratic representation and accountability. They may be used directly, and transparently, to build productive capacity, or as a way to direct scarce private capital into specific activities, helping to solve the collective action problems that often accompany a sector-wide need for training and technology upgrading. Export taxes can serve as the arena for bargains that give shape to constructive ‘embedded’ relations between the state and producers. Pacts shaped by these bargains may be the foundation of an unexpectedly progressive system of revenue raising. Finally, in some instances, the taxation of exports can serve as a way to make foreign assistance into an ‘earned’ resource, avoiding the deleterious effects of aid dependence. Few other taxes have the potential to play all of these state-building roles. In this paper, I draw on the case of Mauritius both to derive and to illustrate these points. I point out where this case confirms assumptions and hypotheses that derive from a variety of historical cases, and where it does not. Mauritius stands out as a relatively well-governed state, with strong indicators of economic and human development. The country’s nearly forty years of continuous democracy and its effective government are unusual among developing countries. Recently, Mauritius has consistently ranked in the top ten of developing countries on institutional indicators that track political stability, voice and accountability, the rule of law and the ease of doing business (World Bank 2002b, 2005). If, as we suggest in this book, taxation has a direct impact on governance, understanding more about this impact may yield insights into the relationship between rulers and the ruled that have resonance beyond this particular case. 6.2
The conventional wisdom on export taxes
The conventional wisdom on the development role of export taxes is dominated by economists, but export taxation also features in the analyses of some political scientists, notably in discussions of the political rationale for high levels of tax, and on the political impact of reliance on plantation and natural resource exports for state revenue. 6.2.1
Economists’ perspectives
Economists have generally argued against trade-distorting measures of any kind, yet they have also recognised the important role played by the agricultural and natural resource sectors in developing countries as
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generators of the resources necessary for investment in industry. Export taxes provide one way of capturing those resources, for direct use in other sectors. Yet export taxes on agricultural products can depress the price paid to local producers, leading to a fall in output and, potentially, an overall loss in welfare. The International Monetary Fund (IMF) and the World Bank have advised, or even required, that agricultural export taxes be lifted in countries as varied as Ukraine (sunflower seeds), Mozambique (cashews) and Mauritius (sugar). In many other countries, tax reforms supported or advised by the international financial institutions (IFIs) have focused on reducing taxes on trade (imports and exports) and replacing them with value-added taxes and more ‘direct’ taxes, such as those on income. Likewise, the elimination of centralised, government-controlled marketing boards and the general freeing of markets under market-oriented structural adjustment programmes has eliminated many of the public and private institutions that provided convenient means of taxing exports. 6.2.2
Markets and states: Bates on export taxes
Robert Bates (1981) documented the way post-colonial regimes across sub-Saharan Africa, under pressure from the ‘revenue imperative’, transformed the colonial-era marketing boards they had inherited into taxation agencies. Established originally with the primary mandates of price stabilisation and the accumulation of reserve funds on behalf of producers, the marketing boards became mechanisms for the efficient extraction of resources from farmers. As Bates showed, revenues from marketing boards soon began to contribute at least 20 per cent and, in some cases, as much as 90 per cent of government budgets (1981: 15–16, 137–45). Bates’s study influenced a generation of political scientists, who grew to regard export taxes as primarily mechanisms of urban bias, exploitation and means of redistributing resources from the poor (rural farmers) to the rich (manufacturers and urban residents). 6.2.3
Commodity exports and state capacity
Other political scientists have argued that states dependent on revenues from mineral resources or plantation commodities for their revenues tend to develop different kinds of capacity (including extractive capacity), and that this is likely to affect their development efforts. This approach can be traced back to the ‘staples theory’ of Canadian economist Harold Innis ([1930] 1956), who pointed out that a country’s export staples (fur, cod, etc.) tend to shape subsequent developments in distinctive
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ways, through the fostering of particular backward and forward linkages. Michael Shafer’s work on sectors (1994: 8) best exemplifies this perspective in more recent work: ‘Different sectors generate different levels of resources and distribute them in distinctive, politically salient ways. Extracting resources from different sectors thus poses different challenges, requires different definitions of the state’s authority to tax, and demands different institutions.’ States that rely heavily on the export of natural resource commodities such as copper (Zambia), or a plantation crop such as tea (Sri Lanka), tend to focus their extractive capacity on this sector alone. The effect of this is to narrowly focus both political bargaining over revenues, and the institutional development of capacity to extract revenues (or to nurture the producer) on the particular producers of the revenue-generating commodity. This might be associated with administrative weaknesses in the rest of the government. In the worst cases, heavy reliance on export commodities to generate revenues can, it is said, produce a ‘resource curse’ (Collier and Hoeffler 2004; Fearon 2005). 6.2.4
Taxation, embeddedness and collective action problems
Finally, some evidence exists that states can use taxation to solve collective action problems in society and, in particular, to help cement ‘embeddedness’: strong, supportive relations binding states and business, allowing them to negotiate and bargain over policies and strategies (Evans 1995). Successful embedding of the state and business builds trust, eases monitoring and supports the exchange of information. It also fosters reciprocity (Maxfield and Schneider 1997), and it can enable states and societies to solve the collective action problems that accompany efforts to upgrade a sector: training, monitoring, research and development, etc. For example, the Colombian state delegated the right to collect taxes to the private sector coffee federation. This resolved a key societal collective action dilemma, overcoming the free-rider problem and allowing the federation to build its own capacity as a policy-making partner for the state (Mares 1993; Thorpe and Durand 1997). Carmenza Gallo (this volume) has also shown how nitrate producers in Chile bargained with the Chilean state to use their nitrate tax revenues to solve their collective action problems, enforcing producer quotas among them and facilitating their efforts to market their nitrate abroad. From this point, we see hints that export taxation (of certain commodities, produced in certain ways) might serve as an input into better governance. The case of Mauritius will demonstrate in more detail that this potential does in fact exist. The next section introduces the Mauritius
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case, while the fourth section focuses on several episodes in the history of taxation in Mauritius, each of which illustrates one aspect of the taxation and state-building relationship. The fifth section considers more generally the factors that might influence the extent to which export taxation can serve as an avenue for some aspects of state-building, and in particular as a stimulus for the building of consultation, cooperation and collaborative, ‘embedded’ state–society institutions that characterise not only democratic systems, but effective systems of governance more generally (Evans 1995). 6.3
The political economy of sugar and taxation in Mauritius: an overview
The eroded volcanic peaks and wooded plains of the small Indian Ocean island of Mauritius were uninhabited when European ships first landed in the sixteenth century. Passing through Dutch and then French hands, the island was gradually populated with white settlers and African slaves and gained importance as a sugar exporter under British rule, which began in 1810. The British overturned race-based restrictions in 1829 and ended slavery in 1835, after which the government sponsored the import of indentured workers, mainly from India. Tension existed between the Franco-Mauritian economic elite and the British colonial masters over many issues: the treatment of slaves and later indentured workers; the price of sugar and the conditions of its entrance into the British market; export taxation and the uses to which export taxes were put; and (not least), the extent to which the local social and economic elite would be allowed to share power with the British. As a result of its history, Mauritius is today a multiethnic nation with some 1.2 million people on three small islands, approximately 2,000 square kilometres in total area. Some two-thirds of the population is of South Asian origin, over 50 per cent Hindu, and another 17 per cent Muslim. The remaining third of the population is mainly of African origin and predominantly Christian, with a minority of mixed race ‘Cre´ole’ ancestry. Nearly 3 per cent of the population is Chinese and an even smaller percentage is European (Franco-Mauritian). 6.3.1
The social organisation of sugar in Mauritius
Sugar was introduced to Mauritius by the French, but became the island’s dominant crop only after the British takeover in 1810 and, in particular, after 1825, when colonial officials helped to negotiate entry to Britain’s protected markets for Mauritian sugar. With entry into the UK
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under the same low, preferential tariff applied to sugar from the West Indies, sugar suddenly became quite profitable, and urban merchants and investors began to buy property. By 1830, there were 1,589 sizeable estates producing sugar (Teelock 1998: 35). The number of sugar factories rose from 106 in 1820, to 171 in 1827, reaching a peak in 1858 with 259 (Lamusse 1964: 359). By the mid nineteenth century, Mauritius was briefly the single largest producer of sugar in the British Empire. Yet as I will elaborate below, the sugar market in Europe was highly vulnerable, subject to fluctuations based on production shortfalls, regional wars, competition with beet sugar and changes in trade policies. Producers were also vulnerable to drought, hurricanes and floods in ways that would not affect producers of copper or gold. The social organisation of sugar production in Mauritius had two somewhat unusual features, both of which can be traced in part to the inherent vulnerabilities of the sector and the politically constructed market, especially the competition with beet sugar. First, sugar production in Mauritius was dominated by the white settlers, Franco-Mauritians, who had been given grants of land by the French, and who were allowed to retain their land by the British. In contrast to many other British colonies, the number of British investors remained a small proportion of the total landowners, both because they had to compete with the FrancoMauritians for land, and because the instabilities in the market made profits very uncertain and losses frequent. In 1909–10, British investors owned 13 out of the 141 large sugar estates, and only 7 of the 62 factories (Swettenham Commission 1909; Colony of Mauritius 1910: X 4). Second, over time there arose a substantial class of small planters of Indian origin. The morcellement, or the breaking up of estates, had been a feature of the sugar economy since its inception, although it accelerated during periods of recession and economic distress. For many Mauritians (particularly merchants, civil servants and professionals), sugar was an investment, and investors borrowed to finance the purchase of estates; in addition, nearly all planters borrowed working capital for the crop. Unexpectedly low prices, a hurricane, or a drought could make planters unable to service their loans. In these cases, landowners might meet their obligations by the sale of portions of their land (the land market was active and there were no restrictions on the ‘alienation’ of land such as could be found in other British colonies with large subsistence sectors). Even with this safety valve, there were frequent bankruptcies, which also fed the market for land. Parcels of land were often bought by groups of investors who then broke them up into smaller portions and sold them again (Virahsawmy 1979: 143). By 1909, Indian planters were cultivating 45,914 acres (some 30 per cent of the land planted to sugarcane)
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(Swettenham Commission 1909). This had increased to 80,150 acres and 46.2 per cent of the total area by 1922 (Watts 1930). In the mid 1930s, there were approximately 14,520 planters with holdings of 100 acres or less, and most of these owned less than 10 acres. Some 200 planters (or companies) had holdings of over 100 acres, and of these, 50 had large estates of 1,000 acres and above; most of these also owned factories (Colony of Mauritius 1934). That large planters and companies would have substantial political clout was obvious, but the political role of the small planters was also recognised by the British early in the twentieth century. A 1909 Commission of Inquiry pointed out that ‘[t]hese men form a very important section of the community and upon their prosperity and progress the future of the Colony must depend’ (Swettenham Commission 1909: 11). The interests of the small planters and the estate owners were not always the same, but when it came to taxation, small planters of Indian origin were available as alliance partners for the large planters. This would become particularly important after constitutional changes and elections in 1948, when the legislative assembly itself became dominated by people of Indian origin. 6.3.2
Export taxation
Throughout the nineteenth and twentieth centuries, sugar remained the principal export crop for Mauritius, and during most of this time it was effectively the only export. Until the 1960s, it supplied almost 100 per cent of foreign exchange earnings for the colony. In addition, for nearly a hundred years, until the imposition of a ‘house’ tax in 1928, it was the only tax to be ‘directly’ experienced by producers. The system of export taxation changed over time. In 1824, sugar was taxed at a fixed rate of one shilling per 100-pound bag of sugar, which amounted to a rate of 15 per cent of the export value in that year (Teelock 1998: 43). In 1853, however, sugar was taxed at a rate of 6 per cent of the export value (Berthelot 1991). By 1885, sugar export duties were again levied at a fixed amount per hundredweight (50 kg) of exported sugar (Colony of Mauritius 1885). The latter system meant that for producers, the weight of the tax was affected by the sale price of their sugar in London: at a high price, the tax was low; with a low price, the tax was high. As a percentage of government revenues, sugar export taxes would vary a great deal depending on the factors affecting exports, and on changes in the fixed rate (Table 6.1). As Table 6.1 suggests, sugar was never the main revenue generator for the government. Colonial officials in Mauritius relied heavily on excise
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Table 6.1 Mauritius: sugar export tax as a percentage of total revenues (Rupees ’000) [Year] 1900
1910
1920
1930
Sources of revenues Import duties Sugar export duties Sugar, special duty Excise duty on rum Licences and other excise House tax Misc. revenues
Revenue % Revenue % Revenue % Revenue % 2,836 39 3,218 39 3,657 24 4,113 28 563 8 738 9 2,165 14 728 5 819 6 1,462 20 1,176 14 3,184 21 2,020 14 1,401 19 1,639 20 3,045 20 3,675 25 496 3 922 13 1,525 18 3,056 20 2,633 18
Total revenues
7,185
100 8,297
100 15,106
100 14,483
100
Source: Colony of Mauritius, Blue Book (various years)
taxes for revenue, a reflection of British practice at home. In 1900, for example, excise taxes on rum contributed 20 per cent of total revenues (Colony of Mauritius 1901). Import duties, diffused over the entire range of imported goods, contributed another 39 per cent. Sugar export taxes contributed only 8 per cent of revenues; by 1920 this had increased to 14 per cent (Colony of Mauritius 1921). However, at the margin the sugar export tax was important, and the fact that all planters, large and small, felt the impact of the tax directly meant that it was a politically important tax. The large sugar estates with factories paid producers for their cane after the cane was processed into sugar, giving them a fixed proportion of the sugar as their payment. Until 1919, planters would then usually use the services of a broker, who would sell the sugar in London (or Bombay), deduct his costs (including the export tax) and only then pay the planter. The export tax would be quite visible to all who used this system to market their sugar. In 1919, Mauritian estates and factories formed the Mauritius Sugar Syndicate (MSS), which gave them a producercontrolled forum for the sale of sugar. By 1920, more than 70 per cent of sugar was sold through the Syndicate; by the time Mauritius signed the Commonwealth Sugar Agreement in the 1950s, the MSS was marketing the entire crop. For many years, the Syndicate was run by the largest estates. They deducted the tax and delivered it to the government, and this ‘tax collector’ role made them very conscious of their contribution to the revenues of the state.
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The export tax and state-building
Over time, the export tax affected state-building in Mauritius in several ways. First, it was part of the stimulus that led in the middle of the nineteenth century to the establishment of the Chamber of Agriculture, which served for nearly half a century as the only body with whom the government could negotiate policies for the sugar sector. The Chamber remained an important partner in the robust business–state relations that still characterise Mauritius, and it was instrumental in helping the sugar industry to solve collective action problems relating to investment, upgrading, insurance and distribution. Second, while the sugar tax itself did not spark the calls for a representative legislative council in the 1880s, it did contribute to Mauritius becoming, in the late nineteenth century, not only a ‘tax state’ but a ‘fiscal state’. This reinforced Mauritian legislators’ rights to ‘voice’, as they saw it. Third, and in the same period, the fact that they were taxed also reinforced planters’ demands for the colonial government to employ Mauritians (from fairly elite groups) in the government, a long-standing demand that led directly to the relatively high capacity of the Mauritian state at independence. Fourth, after independence, the export tax became an important element in the government’s coalition-building. It was made progressive, and the small planters were exempt from the tax. Finally, the export tax, combined with the high sugar prices made possible under the Lome´ Convention’s Sugar Protocol, served as a way to channel substantial foreign assistance to the government, while avoiding some of the negative effects of aid delivered through more conventional routes. I elaborate on all of these below. 6.4.1
The Chamber of Agriculture and collective action problems
The very early establishment of the Chamber of Agriculture, and its facilitation of the solving of collective action problems in the sugar industry, were both intimately connected to the sugar export tax. In the middle of the nineteenth century, the sugar industry faced its first major crisis.2 The crisis was a direct result of changes in import taxes (tariffs) in the UK, and it was exacerbated by the maintenance of the export tax in Mauritius. After 1825, as we saw above, Mauritian sugar had gained entry into the UK at a preferential tariff. Yet the mid-century pressure for a liberal trade regime in Britain would profoundly affect Mauritian sugar exports.
2
The abolition of slavery was also experienced as a crisis for the industry, but the British provided ample compensation for the freed slaves and supported the system of indentured labour that replaced slavery.
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In May 1846, the Corn Laws were repealed, and the Free Trade Act was passed by the British Parliament a month later. Mauritius, the West Indies and other British colonies lost their preferential margins. British importers turned to Cuba, and the returns to Mauritian sugar fell sharply, leading to widespread distress on the island and bankruptcies of estates and their financiers. In the face of these problems, Mauritian planters began to press the government to remove the 6 per cent duty on sugar exports (Napal 1984: 64). Planters continued this demand for the next several years, even though the business community itself was divided on the issue. The Chamber of Commerce (founded in 1850) took a strong stance against any change in the tax, cautioning the government that it would be ‘unadvisable to interfere with this custom of long standing’ (Berthelot 1991). The planters’ inability to get the government to change the sugar duty in the face of the low prices, along with other concerns, led them to form the Chamber of Agriculture in 1853.3 The Chamber became the vehicle through which planters could work with the government to influence tariffs and duties both in Mauritius and in the UK, and to have input into regulations affecting the sugar industry. By 1856, the Chamber had established an office in London to lobby Parliament directly. This became an established practice, which over time built a formidable capacity in economic diplomacy that would be useful to the postindependent government more than a hundred years later (Bra¨utigam 2005). In the 1890s, the Chamber was successful in lobbying the government to use a portion of the sugar export tax to allocate a subsidy for Chamber expenses (Storey 1997: 83). For almost the next hundred years, a portion of the cost of the Chamber’s activities was met from a dedicated tax on sugar exports (Balogh and Bennett 1963: 62). The Chamber also proved successful in organising to solve some of the collective action problems faced by agricultural producers. The most central of these were the research and development (R & D) problem, and the problem of training. Research involved finding new, higheryielding cane varieties with better disease resistance and sugar content. Private actors will ‘underspend’ on agricultural R & D because of market failures: in particular, they cannot easily keep other farmers from appropriating the benefits without paying the costs. This makes sugarcane research a ‘public good’ more appropriately undertaken by collective or government institutions (Doner and Ramsay 2004: 127). Training 3
Planters also wanted to push the government to devise a legal framework for the mortgaging of estates, and they wanted to push the British government to adjust its own tariff policies on sugar.
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specialists in agriculture faces the same problems. Skilled personnel benefit the entire industry, but if one estate trains engineers and agronomists privately, it is likely to face a problem of ‘poaching’ by other estates. Cooperating in the funding of a central training college can overcome these problems. As William Storey (1997) documented in his detailed exploration of the political history of sugarcane research in Mauritius, the Chamber first cooperated with the colonial government in a research project in 1855. During the 1860s, the Chamber again took the initiative in proposing research cooperation between the planting community and the government (ibid. 46), but these research efforts were limited. In 1887, the Chamber established a committee to study the question of research, and the committee proposed that a station agronomique be established, funded by the government and the planters through a dedicated increase in the export duty. The station was opened in 1893 and operated for twenty years under the control of the planters, before being replaced by a colonial Department of Agriculture in 1913. Although the budget of the Department of Agriculture came from general revenues, and not from the export tax, the Chamber again cooperated with the government in supporting the passage of a ‘windfall’ export tax on sugar in 1920, during the period of high prices after the First World War (Colony of Mauritius 1928). Some of the proceeds of the tax were given to the Chamber to administer as the Development and Improvement Fund for Mauritian Agriculture. From these funds, the Chamber and the government founded a College of Agriculture for post-secondary training in engineering and agronomy (Commission on Financial Situation of Mauritius 1931: 99). An additional, dedicated export tax established a fund for operating expenses for the College (Storey 1997: 116).4 The College of Agriculture enabled Mauritian planters to centralise the costs of training personnel for the sugar industry. Through the export tax, all planters paid and eventually, as new approaches and skills diffused through the industry, most would benefit. Agricultural research, however, remained under the Department of Agriculture between 1913 and 1953, during which time the government struggled to retain skilled research staff. By 1947–8, the work of the department had come almost to a standstill, and an Economic Commission recommended that research be handed back to the sugarcane producers, who would be able to set pay scales and conditions of service at more attractive levels (Colony of Mauritius 1948). After five
4
This tax amounted to 3 cents per 100 kg, according to Storey (1997).
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years of discussion, committees and debate, and some reluctance by the Chamber of Agriculture, whose ‘first reaction was to refuse that the Station should be transferred’ to the sugar industry, the legislative council agreed to the shift, and the private Mauritius Sugar Industry Research Institute (MSIRI) was established in 1953, to be funded, as before, by the sugar export tax, which again provided the means for the solving of this collective action problem.5 A 1989 consultant’s evaluation commented that ‘MSIRI funding seems to be more than adequate and the laboratories well equipped, soundly built and well maintained: the library seems to be exceptionally well stocked and staffed. The scientific staff . . . are highly motivated and well qualified . . . . Morale is high and the work done has given the institute an international reputation for the quality of its research’ (Corbett [1989] 2002). 6.4.2
Taxation and administrative capacity: ‘Mauritius for the Mauritians’
At independence, the weaknesses of local bureaucracies were evident in most former colonies. Colonial administrations varied enormously, however, in the extent to which they prepared local officials to fill the posts of the civil service. In Mauritius, the extended experience of an elected legislature, and a long tradition of training and hiring Mauritians in a range of government roles, meant that the government was relatively well prepared to manage the demands of development at independence. Elite Mauritians (most of whom were planters) believed that paying taxes (in their case, export taxes) gave them the right to demand something in return, and this reinforced demands for the colonial government to employ educated Mauritians (who were, at the time, almost entirely from the Franco-Mauritian planter families) in high-level positions in the colonial government. They never relented in this pressure, and the issue came up frequently in the legislative debates. Over time, this longstanding demand led directly to the relatively high capacity of the Mauritian state at independence. The origins of this bargain can be traced to the late nineteenth century. Governor John Pope-Hennessy (1883–9), who had sponsored the Mauritian request for local elections for the government Legislative Council (discussed below), had endeared himself to the population by proclaiming that his policy in appointing people to high levels of the 5
Legislative Council Debates, 23 June 1953: 34. MSIRI is governed by a board of directors that includes three government representatives, and seven from the planter and miller communities.
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government would be ‘Mauritius for the Mauritians’. Pope-Hennessy appointed Franco-Mauritians as chief judge (the appointee also served as president of the Chamber of Agriculture), procurer general and receiver general, and tried to appoint a mixed-race Cre´ole, Nicolas Beyts, as the island’s colonial secretary, but was turned down by London (Ballhatchet 1995: 991; Colony of Mauritius 1901: 337). The relationship between these appointments and the islanders’ payment of taxation was recognised at a banquet organised in Pope-Hennessy’s honour. Some 650 Mauritians, the economic elite of the colony, toasted the Governor’s early accomplishments, and they cheered loudly when the master of ceremonies toasted Pope-Hennessy for making sure that ‘the high offices paid with the Mauritius taxes [were now] open to Mauritians’ (Anonymous 1884: 7).6 In 1901, when a new governor appointed a nonMauritian to a top-level position, the Mauritian members of the Council submitted a resolution reminding the governor that it had been British policy for some time now that the government should employ ‘natives of the Island’ in its central offices.7 The governor responded: ‘that has been the consistent policy of Her Majesty’s Government ever since, a policy of slow but certain growth . . . the policy . . . has been carried out to a very large extent indeed – I make bold to say, that it has been carried out to a much larger extent in this Colony than in any other Crown colony’ (Colony of Mauritius 1901: 266, emphasis added). Although not all governors followed this lead, for the next eighty years many high-level officials, and most mid- and lower-level civil servants (clerks, police officers and teachers), as well as magistrates and some department heads, were appointed locally. When they were not, the planters and taxpayers who dominated the Legislative Council protested vigorously, pointing out again that they paid taxes and therefore had a right to one of the fruits of taxation: employment. The long-standing practice of using locals to staff the government meant that by 1950, three-quarters of the senior government posts were occupied by Mauritians, who had ‘already largely replaced expatriates’.8 Mauritius stood out in comparison with other colonies in the British Empire. For example, only 23 per cent of establishment posts in Singapore were locally filled. 6
7 8
This publication noted as well the diversity of those attending. A table was set up for Muslims, ‘from which the fermented juice of the grape was excluded and also a separate table for the Celestial terrestrials [Chinese]’ (Anonymous 1884:1). H. E. the Governor, quoting from the resolution submitted to the Council of Government, Mauritius, Council of Government, Session of 1901, 24 September 1901: 265. ‘Native Born Administrators and the Colonial Civil Services’, Memorandum by the Secretary of State for the Colonies, 17 July 1950, CAB 129/41 (in Porter and Stockwell 1987: 346–54).
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6.4.3
Parliamentary representation and the rise of the fiscal state
The critical juncture that led in 1886 to elected representation began as a struggle over property rights and expanded into issues of taxation. The country’s second constitution in 1831 had established a Council of Government that included seven nominated members ‘from the chief landowners and principal merchants’ of the community, giving Mauritians some voice in government (Swettenham Commission 1909: 8). In 1882, the British governor, concerned about the deteriorating water quality of the island’s rivers, pushed through an ordinance to protect the watershed by banning the cutting of trees in a band of 150 feet along the stream edges and riverbanks. As this would put a substantial swath of land out of economic use, planters of all sizes saw this as an attack on their ability to plant sugarcane on their property: expropriation without compensation. As one nominated member of the Council proclaimed during the debates on the proposal: ‘If this country had elected representatives, such an abuse would be impossible!’ (Pope-Hennessy 1964: 329). Mauritian planters mobilised to fight for a system that would better guarantee their property rights. They formed a Reform Committee, which decided to push for a system with elected representatives, and they used the argument that taxation was only legitimate when it came from a governing council with elected representatives (Napal 1984: 264–5). By 1885, Mauritius had a new constitution with ten elected Council members, out of a total of twenty-seven.9 The 1885 constitution represented the same kind of credible commitment between the colonial government and the propertied classes of Mauritius that early systems of representative government provided in England. It formed the centrepiece of an implicit bargain which rested on a commitment on both sides. The colonial government would allow the propertied elite an ample voice in the legislature. As a 1909 Commission noted: ‘the constitution of the Colony is such as to allow those engaged in the sugar industry to exercise a very powerful influence in legislation and government’ (Swettenham Commission 1909: 8). Six out of the ten elected members of the Council of Government in 1909 had direct interests in sugar plantations, three of the five unofficial nominated members were on the boards of companies that owned plantations (ibid.). ‘Rights in exchange for export taxes’ was part of the propertied classes’ demand for representation, although the issue of property rights in land was the more immediate cause. Taxation 9
The franchise was limited to those with a monthly income of Rs50, or who owned or rented property valued at Rs300 annually, but there was no exclusion by race or ethnicity.
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played a more central role in the bargain that helped to consolidate the system of representation. The sugar interests would earn foreign exchange and, through their tax revenues, they would enable the country to raise money at a favourable rate, on international bond markets. Their taxes enabled Mauritius to become a fiscal state. A fiscal state is ‘able to leverage its secure revenue base to raise large private loans quickly and cheaply, in both domestic and international bond markets, and therefore to depend substantially on loan financing’ (Moore 2004a: 300). The bargain of representation in exchange for taxation is what makes the revenue base politically secure. In Mauritius, this taxation–accountability–representation relationship also enabled the colonial state to raise loans in domestic and international bond markets, and taxpayer-legislators saw their role as central to this ability. The government would support the production and export of sugar, help fund the plantations through reduced interest rate loans to the planters’ bank, the Mauritius Commercial Bank (MCB), and work to secure lowcost loans from London that could be passed on to the planting community when necessary. The propertied Mauritians, in turn, would supply revenues through export taxes on their sugar; these would also be the effective collateral for international loans. The planters, individually and through the MCB, would also buy government securities, giving loans back to the government. Before the 1870s, some British colonies had raised money for large infrastructure investments on the London market using debentures, a fixed-interest-rate bond chargeable to a specific revenue source: gold mines, plantations, railways, etc. (Benians, Butler and Carrington 1959: 197). Occasionally, the UK government would give an imperial guarantee for a loan, but generally colonies at this point borrowed on their own account. As the ‘Golden Age’ (1870–1914) of international finance began, demand for bonds rose sharply, and colonies began to issue inscribed stock (bonds). In the latter part of the nineteenth century, the British Parliament passed a number of Colonial Stock acts to regulate the ability of British colonies to raise funds abroad. The 1877 Colonial Stock Act regulated the issuance of bonds by allowing them to be inscribed and transferred on the London market, increasing their ease of handing and their availability to the investing public. Some – but not all – colonial bonds were guaranteed by Britain, but even with guarantees, the bonds were still influenced by a colony’s reputation. Countries (and colonies) with good reputations could borrow at lower rates. Default raised future borrowing costs (Ferguson 2001: 171–2). Colonial debt was often substantial. Table 6.2 shows the rate of growth in the public debt of the major British colonial borrowers between 1870
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Table 6.2 Growth in nineteenth-century public debt in British colonies (£ millions) British colony
1870
1880
1890
India Ceylon Mauritius Australia New Zealand Cape Canada West Indies Natal
108.1 0.7 1.1 28.3 7.8 1.1 21.4 0.9 n.a.
160.3 1.3 0.8 59.3 28.5 11.3 31.4 1.3 1.6
192.6 2.5 0.7 143.4 38.8 23.7 58.7 2.8 5.0
Note: Cape and Natal were later merged in South Africa. Ceylon became Sri Lanka. The West Indies became Jamaica, etc. Source: Statistical Abstract for the Several Colonial and Other Possessions of the United Kingdom, in Benians, Butler and Carrington 1959: 197
and 1890. A financial crisis in 1893 put a damper on the wild market for overseas investment of all kinds, and the British colonial government moved to regulate the market. The Colonial Stock Act of 1900 gave ‘trustee status’ to the securities issued by colonial governments in the London money market (Cohen 1950: 15–16).10 Now, most (but not all) of the bonds issued by British colonies would be secured by imperial government guarantee. The list of colonies that could issue their own bonds was still quite limited, as Table 6.2 suggests. In Africa in this period, only Mauritius and the South African colonies of Natal and the Cape were able to issue bonds.11 A long history of successful debt repayment created its own culture of legitimacy, and, in the Council’s view, the system they had established – of government-supported debt, linked to sugar industry investment and paid by dedicated export taxes – supported their claims for democratic representation, voice and accountability. A spirited Council debate from the turn of the last century supports this claim (Colony of Mauritius 1901).
10 11
This was passed when Joseph Chamberlain was Secretary of State for the Colonies. See also JessoPress (1976); Kesner (1982). As one history of the period remarked: ‘The West African settlements, reluctantly held, struggled, with the aid of advances and loans, towards solvency. They were the Cinderellas of the Empire’ (Benians, Butler and Carrington 1959: 197). The Gold Coast (Ghana) began to borrow in the 1890s.
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In 1901, an elected council member submitted a motion to repeal a 10 per cent surcharge on customs duties that had been imposed to close a budget deficit several years earlier. This occasioned a long discussion in which the official members of the government debated with the elected members the extent to which they could directly influence tax policy. The government’s position was stated by the procurer general: the elected members of the Council were not allowed to propose changes in tax policies: ‘The constitutional principle is that the Sovereign or his representative must be absolutely responsible and unfettered in his management of the revenues of the Crown.’ Besides, he continued, when the Home Government maintained tight control of taxation, then interest rates would be lower for the Colony’s bond issues. Others joined the debate. A planter and elected representative from rural Moka, Henri Le´clezio, admitted that yes, this was true. When the Imperial Government issued a guarantee, the Colony could borrow at 3 per cent; without a guarantee, they would pay a per cent or so more. But the government was moving backward in its promises of voice and accountability: We all admit that in the last resort the Imperial Government is responsible; and of course if the Imperial Government is responsible it should have a control; but not to the extent that is claimed now. The control which is claimed now is nothing more or less than this: We shall do what we please but you will not have the right of expressing your views, except when we come to you for a vote. That is all. But you curtail our rights! We had the right before – it is not denied – of expressing our views upon the existing taxation. That is denied to us now. We cannot open our mouths – certainly that is curtailing our rights. When that has been secured what will come next? Gradually then we shall cease to have any privilege. (Colony of Mauritius 1901)
Le´clezio then turned to a dispatch by Secretary of State for the Colonies Joseph Chamberlain, which had commented on the financial plight of the West Indies, saying that ‘where financial assistance is given to a Colony by the Imperial Government, the Imperial Government must have control over its finance’. It may be right as far as the West Indian Islands are concerned, but what financial assistance has been given to the Colony of Mauritius? I fail to see. If I understand aright the meaning of this sentence there have been grants, there have been doles given to the West Indian Colonies, but here nothing of the kind. . . . The Imperial Government on two occasions has assisted us to this extent, that they have endorsed our bills; they have guaranteed our loans – that is all. (Colony of Mauritius 1901)
He then pointed out that the sugar exports were the security for the loans, which were repaid through dedicated export taxes, and he emphasised that these dedicated export taxes contributed to a cycle of credit,
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Table 6.3 Bonds issued by ten most active ‘developing’ countries and colonies, London bond market, 1871–1881 Country/ Colony
No. of bonds
Dates of issue
Brazil India
8 12
Chile Natal Mauritius Cape Colony Ceylon Turkey
8 5.4 7 7 5 15
Argentina Egypt
7 11
1852, 59, 60, 63, 65, 71, 75, 79 1872 *, 73, 74, 77, 78, 79, 80, 82, 84, 88, 93 1822, 42, 58, 66, 67, 70, 73, 75 1860–62, 67, 72, 76 1862, 63, 65, 69, 76 1860, 61, 63, 65, 67, 73–80 1863, 65, 67, 76, 80 1854, 55, 58, 60, 62, 63, 65, 69, 71, 72, 73, 74, 77, 78 1866, 70, 71, 72, 73, 74 1862, 64, 66, 67, 68, 70, 77, 78
Average rate of interest (%) 4.75 5.2 5.2 5.4 5.5 5.6 5.6 5.9 6.3 6.5
Note: Includes only non-European countries and polities that are today considered low or middle income. Colonies are in italics; * indicates date of redemption. The ranking is based on number of bonds issued, not on their value. Countries are ranked in this table by the average rate of interest. Source: Calculated and compiled by Preston Winter from The Investor’s Monthly Manual 1871–81
production, taxation and representation. Members of the Legislative Council (who, Council members often pointed out, represented taxpayers in general) had earned the right to have a say in issues of taxation and fiscal policy. When a debtor does not fulfill his engagements towards his creditors the creditors have a right to step in and to see more clearly into the administration of the affairs in which they have invested money. But that has never been the case of Mauritius. I have been mixed up with the affairs of my country at least for the last forty years and I have never seen or heard anything of the kind . . . Make any comments you like upon Mauritius, but do not say that Mauritius in some respects is similarly situated as the West Indian Islands. We are not in their position. We have always met our engagements, we have always striven to pay our creditors – and that is why we have such a good name in England and why our debentures are worth 13 per cent premium. (Colony of Mauritius 1901)
As Table 6.3 suggests, in the late nineteenth century, Mauritius issued a number of bonds on the London exchange, and the island’s activity was among the ten most active of the polities we now call ‘developing countries’, and the average interest rate it paid was also among the lowest (the countries are ranked by the average interest rate).
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The export tax was the vehicle by which planters established the credibility of Mauritius in the nineteenth and early twentieth centuries’ international bond markets. The concern with creditworthiness, and the state-building relationship that supported it in 1901, is reflected a century later, not only in the strong democracy that Mauritius enjoys, but also in the continued attention paid to its bond ratings. Moody’s recently gave Mauritius a rating of ‘A2’ for long-term bonds denominated in domestic currency, similar to the rating given to Greece, while the country’s longterm government bonds in foreign currency have a rating similar to the Asian ‘tiger’ Korea. In 2002, the World Bank noted that ‘Mauritius was one of the few developing countries whose rating was not revised downward in the wake of the September 11 events’ (World Bank 2002c: 4). 6.4.4
The progressive export tax and the dirigiste state
After the Second World War, the export tax became a tool for the colonial government to use to intensify state-directed rehabilitation and development of the sugar industry and to support the first effort to channel welfare benefits directly to agricultural workers. British colonial policies became distinctly more development- and welfare-oriented after the coming to power of the Labour Party in 1945. At the same time, a small increase in the number of Indo-Mauritians on the Legislative Council reinforced the equally small number of reform-minded elected legislators. Dr Seewoosagur Ramgoolam, who later became the country’s first elected prime minister, was appointed to the Legislative Council in 1940, and used his position on the Council to press for welfare benefits, suggesting that a sugar export tax could be levied to pay for greater social spending (Selwyn 1983: 265). Some of the new programmes would be funded by the Colonial Development and Welfare Act (1940), but the UK was itself strapped for foreign exchange after the war and, whenever possible, it continued to look to the colonies to provide the resources for their development. The sugar export tax and associated levies provided the entry-point for several new programmes that were designed to bolster the financial and social stability of the island’s main employer. A Cyclone and Drought Insurance Fund, established in 1946, created a selfinsurance scheme for sugar planters, paid out of premiums charged on the gross export receipts of sugar (Balogh and Bennett 1963: 131). The colonial government also intervened to ensure that sugar revenues would be directed towards the economic reconstruction of the sugar industry after the war, even if planters might have wished to use the revenues elsewhere. All of the British colonies with sugar industries had similar funds: the West Indies, British Honduras, British Guyana and Fiji. These
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funds were pushed by Arthur Creech-Jones, the Fabian socialist Secretary of State for the Colonies, who proposed them as a way to ensure that the benefits of higher sugar prices would be ploughed back into rehabilitation of estates and improvements for labour. As Veerasawmy Ringadoo, who would later become the country’s longestserving Minister of Finance, explained in 1961, Creech-Jones proposed this ‘in order that the cost of production does not go up too high in comparison with other countries and, instead of increasing the wages, the Secretary of State thought that it was a good thing to provide for the welfare of the workers’.12 Both the self-insurance fund and the social welfare funds helped to solve common collective action problems: problems of moral hazard and adverse selection create problems when insurance is provided privately and sought voluntarily. Private producers are likely to be under-insured if left to themselves, and, as a whole, they are certainly likely to contribute less to the general welfare of workers than would be socially optimal. In Mauritius, the Sugar Industry Rehabilitation Fund, established in 1948, was funded through a fixed-rate tax per ton of sugar exports (Lutchmeenaraidoo, D’Espaignet and Sidambaram 1973). Factories and planters could apply for assistance from the Fund when investing in capital improvements. After independence, the Fund was replaced (in 1974) by the Sugar Industry Development Fund, and the tax became a variable levy, but the principle of targeted investment remained. Also in 1948, the government established the Sugar Industry Labour Welfare Fund, funded through another levy on sugar exports. This fund provided (and still provides) low-interest loans for housing and educational expenses such as books, grants for community development activities, and scholarships that provide monthly allowances for secondary and tertiary education. Benefits were originally restricted to sugar industry workers and their families in the sugar industry, but later extended to include those working in the docks where sugar is loaded onto ships. The sugar export tax through the global cess (paid by all sugar exporters) thus continues to contribute directly to the financing of some of the major state/societal institutions that give structure to the sugar industry, while at the same time providing government with a ready pool of targeted funding for its twin goals of economic development and welfare. At the same time that the sugar export levies were building institutions in both state and society, the export tax itself was re-engineered into an important element in the government’s democratic coalition-building 12
Ringadoo speech, Mauritius Legislative Council Debates, (1961) in Gayan and Gopauloo (eds.) 1990: 114.
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and its strategy of redistribution. In 1975, facing elections, the government exempted its major constituency (the mainly Hindu small planters) from paying the export tax. From a tax set at 6 per cent of gross proceeds and applied to all planters, the export tax was now applied in five progressively steeper steps, with the bottom rate (for planters exporting less than 20 tonnes) set at zero, and the top rate set at 12 per cent. Between 1979 and 1988, the ceiling for the zero rate was gradually increased until all those exporting less than 1,000 tonnes paid no export tax, while the largest planters saw their tax rate increase to 23.6 per cent. The administration of the tax and its delivery to the government were left in the hands of the Mauritius Sugar Syndicate, thus neatly avoiding what might have seemed a daunting task for the revenue authority. This move was highly popular with the small sugar planters, who elected the Ramgoolam government again in 1976, at a time when almost every other regime in sub-Saharan Africa was under authoritarian rule. It underlined the potential of export taxes to be made progressive, and their unexpectedly useful role in helping to consolidate democracy. 6.4.5
The export tax and the ownership of aid
Finally, the export tax, combined with the high sugar prices made possible under the Lome´ Convention’s 1974 Sugar Protocol, served as a way to channel substantial foreign assistance to the government, while avoiding some of the negative effects of aid delivered through more conventional routes. The Sugar Protocol provided preferential quota arrangements to sugar exporters in the African, Caribbean and Pacific (ACP) countries, who were also allowed to take advantage of the high support prices provided to European beet sugar. Although this benefit was funded by Europeans in their role as consumers, rather than as taxpayers, it provided a substantial flow of foreign assistance to the members of the Protocol. For example, between 1983 and 1988, the European price for sugar averaged 20 US cents per pound, compared with an average world price of just over 6 cents (World Bank 1989: 8). Preferences like these have been criticised for keeping countries locked into a pattern of raw material production. This is fair, yet it is not generally acknowledged that this method of delivering assistance may also have some very substantial benefits. The Sugar Protocol preferences have channelled an estimated 3 to 7 per cent of GDP to Mauritius through the higher-than-market sugar prices. This source of foreign aid is largely ignored in studies of aid, but for countries like Mauritius, which invested in supporting the development of the privately owned industry while also levying a progressive tax on medium and large sugar producers
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in order to recoup some of this benefit, aid revenues through Sugar Protocol sales were ‘earned’ income. With incentives from the government, the private sector in Mauritius channelled their sugar ‘rents’ into local export processing industries and tourism services. During the 1980s and 1990s, this made Mauritius one of the fastest-growing middleincome countries in the world. As Moore (1998) has pointed out, earned revenues are more likely to build accountability and foster a developmental state than revenues through natural resource mining or ordinary aid. They may also do more to promote the private sector, if accompanied by the right incentive framework. Developing countries need to produce in order to procure the special preferences in the European market. This way of delivering aid resembles the ‘earned income tax credit’ often touted in the United States as a way to boost incomes of the working poor. The rise of WTO rules and the demise of special trading relationships mean that this source of ‘earned aid’ is slowly being eliminated. 6.5
Export taxes and state-building: observations and factors to consider
Rural societies are structured differently in different countries, and holders of taxable assets in rural societies will vary in the degree to which they can influence the central government, offer alliances or resist taxation (see Bernstein and Lu¨, and Fjeldstad and Therkildsen in this volume). Because of this, we can expect that taxation focused on agricultural exports might affect state-building in different ways (Boone 2003). Drawing on the literature about taxation in general and aspects of governance or state-building, as well as on the experience of Mauritius, we can derive five sets of factors that might be expected to influence the impact agricultural export taxation has on state-building. This framework probably applies only to situations where the owners of assets in the export sector(s) are private local citizens, not transnational corporations or the state itself. It is important to point out that bargaining and consultation are not the only possible outcomes. Export taxation might also influence other aspects of state–society relations, such as redistribution, or it may have an effect on state capacity or on societal capacity more directly, as in Mauritius. First, the degree to which the export tax is experienced as a direct or an indirect tax is likely to affect its political impact. Although as Moore points out in his chapter for this volume, the conventional distribution of taxes into these categories does not necessarily correlate with the degree to which a tax is ‘felt’ or its incidence understood, it is nevertheless a useful distinction for understanding the pressure a tax might provide for
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taxpayers to resist it, mobilise against it or seek to gain reciprocal benefits in return for its payment. Second is the extent to which the assets that generate the export are mobile or immobile (exports themselves are, obviously, mobile). This widely cited distinction can be traced to Bates and Lien (1985), who use it to distinguish between situations where sovereigns will be more likely to bargain with their subjects (possibly giving them parliamentary rights) as opposed to extracting resources unilaterally. Owners of gold mines cannot move their assets to another country as easily as can owners of sewing machines. This distinction would also hold for tree plantations, such as cocoa or tea, or pulpwood, but for other agricultural crops produced on an annual basis, the distinction is less clear. It might depend more on the degree to which there are other, lower-tax uses for land, or a viable market for land (so that owners could sell and leave) and the extent to which there are effective exchange controls on the export of capital. Third, we can point to the organisational strength and collective action capacities of the taxed sector: are export producers formed into strong associations, or are they scattered and weak? As Bates (1981) pointed out, in the case of sub-Saharan Africa small-scale farmers producing for export were taxed at extremely high rates because they could not organise themselves to resist, other than by exit. Organised interests are not only more likely to be able to effectively resist efforts to tax them (thereby forcing bargaining), but they are more likely to be able to build the kinds of organisations that might serve as partners for the state, in corporatist or semi-corporatist systems that might themselves have an impact on the state’s capacity (Gallo, and Joshi and Ayee, this volume). Well-organised producers associations can also be delegated some of the government’s monitoring and enforcement role, reducing costs for the state (Levi 1988). This was the case in Mauritius, where the well-organised Chamber of Agriculture also played a central role in reducing collective action problems, and where the expenses of this private sector association were partially offset by a levy on sugar exports. Fourth, producers in the taxed sector might have political salience over and above conventional measures of ‘relative power’ or strength. This political salience might come from a shared ethnic, religious or extended family background. For example, Ashanti cocoa producers might be expected to have a different relationship with a Ghanaian president from the Ashanti region than with a president from another part of Ghana, and this might affect both the state-building strategy chosen by that president, and how taxation of exports fits into that strategy. This was the case in Mauritius, where the wealthiest sugar planters were exclusively Franco-Mauritian, while the small planters were almost
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exclusively Hindu, the identity of 52 per cent of the population. It was this political salience that helped push the government into policies such as the progressive, redistributive export tax. Finally, fifth, the extent of vulnerability or threat in the overall environment might also affect the way agreements over export taxation are formed, and their effects. As Centeno noted (1997: 1570), threats affect the ‘willingness of the population’ to accept the burden of taxation, in exchange for protection. Threats can also make taxed groups more receptive to state direction and can foster cooperation with the state, while at the same time threats might make the state more receptive to target some part of the tax resources to build its own capacity to support producers.13 In Mauritius, sugar production had a long history of instability, and, until the signing of the Sugar Protocol, the island’s income rose and fell sharply depending on conditions in the sugar market. This made producers more receptive to using the export tax to build the industry, and the institutions on which it rested. 6.6
Conclusion
Markets are political arenas (Bates 1981: 6) and taxation is a central element of how governments shape that political arena. Mick Moore’s chapter for this book argues that taxation may be ‘good for governance’. This chapter has attempted to cast a new perspective on export taxation by sketching out the history of taxation in Mauritius, demonstrating how export taxation, in particular, was good for governance there. Although the sugar industry benefited from extensive rents (thanks to the Commonwealth Sugar Agreement and the Lome´ Convention Sugar Protocol), these rents never became a resource curse, because they were earned by the tens of thousands of sugar planters, collected by the government through the export tax and used to build capacity and welfare in the state and in society. The export tax helped the private sector to organise, and it built their capacity to interact with the government. It helped both state and society to solve some of the collective action dilemmas they faced in building skills and supporting research on sugar. It served to underpin the demands by taxpayers for voice and for state employment, leading to a state that was unusually democratic and with an unusually high proportion of local officials at independence. On the advice of the World Bank, Mauritius abolished the sugar export tax in 1994, replacing the revenue with a value added tax on consumption. Because the state is 13
For an extensive discussion of the incentives that threats provide to collaboration between states and business, see Maxfield and Schneider (1997: 25–30).
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already relatively strong, democracy relatively consolidated, and because producers have well-defined institutional connections with the government, the end of nearly two hundred years of export taxes has not had much impact on state-building in Mauritius. In 2005, the European Union agreed to reforms that were expected to lower the guaranteed price of sugar by 36 per cent between 2006 and 2010. This will deeply affect the Mauritian economy: the IMF projected that Mauritius would lose up to 3 per cent of GNP (International Monetary Fund 2006). This will cut the rents earned by private farmers in Mauritius and may affect the levies that support the various collective agricultural institutions; however, the 1994 decision to eliminate the export tax means that the impact on the state will be indirect. History suggests that Mauritians will be able to overcome this newest shock. Successful collective action in the sugar industry existed long before the Sugar Protocol and the high prices of the current regime, and it is likely that it will persist after, as well. It is true, as Bates (1981) argued, that governments in sub-Saharan Africa and elsewhere have used export taxes as a mechanism of political control and private aggrandisement, building coalitions that marginalised the vast majority of producers. However, Mauritius does not conform to this pattern. The reasons for this are complex and space precludes even a brief review; the differences between Mauritius and other countries in Africa were apparent long before independence and reflect in part the ‘settler’ nature of the institutions established under colonial rule (Bra¨utigam 2005). These differences are likely to affect the political role of export taxation, possibly along the lines suggested in the previous section. Yet these differences should not lead us to the assumption that the abolishment of export taxes will have little impact in other countries. Exports of agricultural commodities are still one of the main sources of income in many poor countries. Yet in their zeal to create tax profiles that resemble the current consensus on low-marginal-rate income taxes, broad-based consumption taxes, and in their assumption that agricultural export taxes are almost always ill-advised, policy-makers (and their international advisers) have been shifting away from export taxes as an important source of revenue. This strategic move may improve the incomes of individual farmers, but at the same time, it removes the export tax as a potential contribution to state-building. In particular, agricultural export taxes can be used not only to marginalise rural groups, but also to include them in the political process, strengthen their ability to solve collective action problems and support the consolidation of the strong institutions on which development ultimately depends.
7
Tax bargaining and nitrate exports: Chile 1880–1930 Carmenza Gallo
7.1
Introduction
Taxation can be a powerful mechanism generating consultation and bargaining between the state and the owners of assets. Under what conditions is bargaining likely to prevail over its opposite – unilateral extraction by the state? Margaret Levi argues that rulers will maximise revenue subject (in part) to the constraints of their bargaining power relative to those who are being taxed. She defines bargaining power as ‘the degree of control over coercive, economic and political resources’ (Levi 1988: 2). Bargaining is clearly more likely when there is a balance of power between state actors and taxed groups. However, this is not the whole story. Using a case study of the nitrate in Chile between 1880 and 1930, this chapter focuses on the determinants of bargaining in the taxation of exports in a natural resource economy. I identify the main factors that explain when taxation is likely to lead to either bargaining and consultation or the unilateral imposition of taxes by the state. The chapter contributes to the broader project of this volume: understanding the impact of taxation on the development of political institutions in developing countries. More specifically, it contributes to the bargaining model of taxation, particularly to Levi’s work, by exploring the impact of a factor that affects many developing countries: the instability of the world market of natural resource exports. I argue that instability reduces the scope for stable
Previous versions of this paper were presented at the Workshop on Contentious Politics, Lazarsfeld Center for the Social Sciences, Columbia University; at the Seminar ‘Taxation Perspectives: A Democratic Approach to Public Finance in Development Countries’, Institute for Development Studies, Sussex University UK; and at the Tax Workshop at the Danish Institute for International Studies. Special thanks to participants in the seminars and to David Bevan, Andy Buck, Susan Eckstein, Juan Diego Garcia, Paul Ingram, John Krinski, Roy Lickleider, Richard Snyder, Charles Tilly and Takeshi Wada. I am indebted to the editors of this book, Deborah Bra¨utigan, Mick Moore and Odd-Helge Fjeldstad, for their substantive criticisms and editorial assistance.Direct correspondence to: Queens College, Department of Sociology, 65–30 Kissena Boulevard, Flushing NY 11367–1597. E-mail:
[email protected].
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and institutionalised bargaining between the state and groups of taxpayers, and makes the development of consultative institutions more difficult. The period I am studying is known in Chile as the ‘Nitrate Era’. It is not a unique case. In Latin America alone, the Bolivian and Venezuelan states were, during the first half of the twentieth century, financially dependent on the taxation of exports from mineral sectors – tin and oil respectively – that were in private hands. In the Chilean case, mineral taxes accounted for up to 50 per cent of government revenues in many years: governments had strong incentives to pay serious attention to the industry. It is an illuminating case because it covers a complete cycle, from a boom that started around 1880, when nitrate exports were first taxed, to a bust in world prices. We can therefore trace how changes in the international market situation affected the incentives and ability of the state and exporters to bargain around taxation. I do this by defining three historical periods: conflict, in 1880–95 (Section 7.4); bargaining, in 1895–1915 (Section 7.5); and unilateral state action, in 1915–30 (Section 7.6). Before examining these historical periods, I present an analytical framework for examining the conditions under which taxation is characterised either by bargaining and consultation or by unilateral state action (Section 7.2); and an historical introduction to nitrates in Chile (Section 7.3). 7.2
Negotiated or unilateral taxation?
The nature of the relationships that state authorities develop with taxpayers is an essential factor in the shaping of the institutions that result from taxation. For example, taxation was crucial for the historical development of institutions supportive of democracy in situations where state actors needed resources which they did not and could not control. This lack of control compelled state actors to negotiate and consult, eventually generating the norms and formal contracts that came to govern representative institutions (Hopcroft 1999; North and Weingast 1989; Tilly 1992). Other outcomes are clearly possible: taxation can be coercive (Chapters 4 and 5 in this volume), or else the state can directly control resources that produce a significant part of its revenues (Levi 1988). But taxation may generate incentives to bargain, independently of whether or not these incentives are sustained over time or whether they become institutionalised. Under what general conditions is taxation more likely to be based either on bargaining or on the state’s unilateral control? When taxation leads to bargaining, what is necessary for this bargaining to be sustained?
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In principle, taxation based on bargaining generates self-perpetuating incentives for state agencies to consult with taxpaying groups, and for the latter to seek access to decision-making fora and to hold officials to account. Taxation based on bargaining can critically reinforce the generally weak mechanisms that promote accountability and that limit arbitrary use of power in developing countries. As Moore (2001) points out, because material prosperity increases taxability, taxation might expand the overlapping spheres of interests between the state and the taxpayers and the incentives for civic politics, and, in general, might improve governance. Thus for many reasons, taxation may lead to consultation and bargaining with the owners of assets. However, this is most likely to happen when there is a fairly equal balance of power between state authorities and taxed groups (see Moore in this volume). Given the comparative advantage of the state in coercion, taxation induces bargaining when the advantages outweigh the unilateral use of state power, and when the conditions for a power balance are sustained long enough to become governed by stable formal rules (North 1990). What factors influence the balance of power in a situation where the state needs access to revenues from mineral resources owned by private actors? In general, four characteristics of tax systems are likely to influence whether state authorities bargain with taxpayers or extract revenues unilaterally: first, the mobility of the taxable asset or resource; second the extent of revenue concentration (i.e. few or many major revenue sources); third, the existence of threats to revenue flows (i.e. external or internal economic, political or environmental shocks); fourth, the political power of taxed groups (i.e. their ability to secure allies). 1. Type of resources taxed: state authorities are more likely to bargain with those taxpayers who control mobile resources that can be moved (or hidden) to escape taxation. Owners of mobile resources can withdraw them if the terms of exchange with state authorities are not beneficial (Bates and Lien 1985: 55; Zolberg 1980). Mineral resources are, with a few exceptions (e.g. diamonds), immobile and, everything else being constant, likely to be taxed first. 2. Revenue concentration: the extent to which tax revenues derive either from one concentrated source or a diverse variety of sources. Taken alone, the implications of the degree of revenue specialisation are ambiguous. On the one hand, where the state is dependent on a specialised tax collection apparatus exploiting a single or a few sources of revenue, the taxed group might have considerable bargaining power. On the other hand, this very lack of easy alternatives might motivate the state to exploit and overtax a single source. Thus, the influence of
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revenue specialisation on the final outcome, bargaining or state controlled taxation, is likely to be highly dependent on other factors in the configuration. 3. Revenue stability: external shocks in the form of threats to the production of taxed resources alter the priorities of both taxpayers and state actors and introduce changes in the bargaining between the two sides (Kiser and Barzel 1991). For example, continual external threats of war and war itself keep states in financial need, but, critically, war enhances the value of protection, which is then added to the bargain with taxpayers (Centeno 1997; Hopcroft 1999; Tilly 1985, 1992). Furthermore, economic threats, for example sharp market downturns that endanger the viability of the production of taxed resources, enhance the value of state policies geared to protect and promote them (Shafer 1994). 4. The political resources of the taxed groups, especially their ability to make alliances with other non-state actors to prevent the state exploiting them (Levi 1988; North and Weingast 1989). Political resources are likely to be especially valuable in two contexts common in latedeveloping countries. The first is when the taxed group is regionally concentrated and/or numerically small – as is typical of exporters of mineral resources. Small but economically powerful export elites need political resources to prevent situations in which the economically weaker coalesce against them. The second is in unstable environments where bargaining over taxes is not fully institutionalised. Here the political resources of taxed groups can prevent state actors from using their superior coercive power to impose taxes rather than negotiate them. These four features of tax and revenue systems are likely to interact with one another to affect the degree to which taxation arrangements are bargained or imposed unilaterally. This framework suggests that bargaining is likely when the following combination of circumstances enhances the power of the taxed groups: high levels of revenue specialisation, a high level of mobility of taxable resources; the absence of external or domestic shocks to production or revenues; and the ability of the taxed group to mobilise political allies and political resources. Conversely, taxation is likely to be state-dominated where high levels of revenue specialisation are found together with immobile taxable assets; where external shocks produce sharp variations in the flow of resources; and where the owners of assets are unable to mobilise political allies. States dependent on taxes on mineral exports (such as tin in Bolivia, nitrate in Chile and oil in Venezuela) present a particular configuration of the above factors that makes stable and institutionalised tax bargaining
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unlikely.1 Taxation of mineral resources yields high revenues at the same time that these sources of revenues are easy to tax (Ardant 1975; Gallo 1991; Shafer 1994; Tilly 1992). In turn, the ability of the state to obtain a great deal of revenue from a concentrated source encourages dependence on that sector, often at the expense of not developing alternatives, or of abandoning lower-yield sources of taxes. Further, mineral sectors are, as Shafer (1994) argues, capital intensive, inflexible and immobile, and restrict the state’s economic strategies and the latitude to formulate economic policies. These policy restrictions are politically neutral – they do not imply an intrinsic advantage for mineral producers or for the state, but are part of the economic characteristics of capital-intensive mineral sectors. In addition, these sectors tend to be geographically concentrated, to be owned by a small group of (often related) firms and to operate as enclaves with few or no economic linkages with the domestic economy.2 The owners of these assets are thus often easy to isolate and to target for taxation.3 A complicating factor that may be critical in these cases is the exposure of most mineral exports to exogenous shocks in the form of sharp fluctuations in international prices. Such shocks threaten state revenue flows and can increase the incentives for the state to dispense with bargaining and impose unilateral taxation. Shocks also weaken producers and can cause difficulties for collective action. Producers may turn to the state for assistance in managing the price instability. In short, external shocks may change the rationale for state–society interaction enough to inhibit the institutionalisation of relationships of bargaining and consultation. Where large mineral resources are being exploited, states will depend on those resources for their tax revenue. Whether that tax relationship will be bargained or unilateral thus should depend on two variable factors: (a) the political resources of the taxed group, and (b) the revenue 1
2
3
The resource literature argues that states dependent on rents from mineral wealth are undemocratic and, consequently, do not present taxation based on bargaining. Yet, in this literature there is no consensus about the factors that explain this outcome (Anderson 1987, 1995; Beblawi 1987; Crystal 1990; Karl 1997; Ross 2001). Mancur Olson (1965) points out that group size facilitates collective action. Indeed owners of mineral firms in the export sector are known to organise economic cartels that are able to resist, at least temporarily and often with the help of the state, downward price pressures in the international market. Yet, as it will be suggested later in this chapter, this ability to act collectively does not necessarily lead to commensurate domestic political power. The nationality of the taxed export groups does not seem crucial in determining taxation and its nature. The tin barons in Bolivia were Bolivians, and were taxed as rapidly as the nitrate owners in Chile, many of whom were English. The extent of political connections of these elites with others, especially with the landed classes, seems to matter more as to whether they are taxed and the eventual outcome of taxation (Gallo 1997).
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stability. The case of Chile supports this hypothesis. The nitrate cycle in Chile presents three different combinations of these two factors, which are examined in the following sections. First, in a context of growing nitrate exports and relative high capacity on the part of the producers to control the effect of external shocks (1880–95), we find a period of (unstable) political conflict in which state actors and nitrate owners struggled over the terms of taxation. The state eventually succeeded in imposing its own terms for taxes. This was followed by a period (1895–1915) when state actors managed to regularise and politically legitimise taxation, while the nitrate producers, through a cartel, maintained relatively stable international nitrate prices. There was visible bargaining: nitrate producers (reluctantly) accepted taxation, while demanding state services and expecting to influence how tax revenues were spent. Consultation and cooperation were relatively institutionalised between the two sides. The final period (1915–30) was characterised by external shocks, the failure of collective action to stabilise prices, and, at one point, the near collapse of nitrate exports. Nitrate owners became increasingly dependent on the state, and state actors were able to impose unilateral taxation. 7.3
Chilean nitrate: an economic and political overview
The five decades of the Nitrate Era (1880–1930) were a period of fundamental economic and political transformation in Chile. Figure 7.1 shows the rapid development of the new nitrate sector, which supported an unprecedented economic expansion in the Northern Province, partly through an increased demand for agricultural products consumed by nitrate workers. It also promoted linkages with the agricultural sector in the central region. In addition, the export sector supported a remarkable expansion of the state and, through taxation and state investments, massive transfers of resources from the north, where the nitrate was located, to the central region of Chile. Economic expansion was accompanied, however, by economic and political instability. Until 1915 or so, nitrate was primarily used as a fertiliser. Its demand and its price therefore varied depending on the market for agricultural products in Europe, particularly in four countries (Germany, France, the UK and Belgium). The First World War practically ended the use of nitrate as a fertiliser, but increased its use in the weapons industry. This induced profound changes in the industry and increased uncertainty over prices. Politically, the Nitrate Era roughly coincided with a period of struggle about the constitutional division of powers between the executive and Congress, known in Chilean history as
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350
Indices (1900 = 100)
300 250 200 150 100 50 0 1882
1890
1900
1910
1920
1930
Year Price per tonne Exports (tonnes)
Figure 7.1 Chile 1880–1930. Nitrate and iodine: indices of tonnes of exports and nitrate prices per tonne ( pounds sterling) Source: Cariola and Sunkel 1985
the Parliamentary Period (1882–1920). Conflict between the executive branch and the legislature intensified in the 1870s when Congress passed a constitutional reform that undermined presidential power (Collier and Sater 1997: 121–2). Previously, the executive had gained some control of Congress by electoral manipulation. The electoral reform, however, made such manipulation difficult and tilted the power in favour of the legislature. This created incentives for the executive to seek out alliances with segments, factions or political parties represented in Congress. At the same time, political parties competed for the expanding government jobs and government spending (ibid.). Increased revenues through nitrate taxes fuelled the political competition, as resources extracted from the northern nitrate regions were now available to be invested in other central and southern regions, and could also be used for patronage. In the War of the Pacific (1878–93) Chile fought Bolivia and Peru for control of a disputed bordering territory. Following its victory, Chile annexed the Peruvian province of Tarapaca and the Bolivian Antofagasta region, both desert areas where rich nitrate deposits were located. Nitrate from these regions became the mainstay of the Chilean economy. For fifty years nitrate was the main export commodity, the
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main source of foreign exchange and the main source of state revenues. Hence, from 1900 to 1930 close to 50 per cent of total state revenues came from taxes on nitrate and iodine.4 Owing to the richness of the deposits, their high quality and easy access, Chile became the sole world producer of natural nitrate by the end of the nineteenth century. Since the nitrate deposits were discontinuous and located across a relatively extensive area, mining was effectively decentralised (Cariola and Sunkel 1985: 149). Soon after the War of the Pacific, the Chilean government recognised the property claims of foreign individuals who had nitrate certificates issued by the Peruvian government. Thus, the mines became owned by an almost equal number of Chilean, British and German proprietors (Blakemore 1974; Cariola and Sunkel 1985: 154). Cariola and Sunkel note that the proportion of mines owned by Chileans rose from 18 to 36 per cent after the war, with the British ownership share increasing in the ensuing decades. A political split surfaced between Chilean producers of nitrate in the territory that originally was part of Chile and the producers from the provinces annexed, making collective action more difficult. Deposits in the Chilean territories were not as rich as those in the annexed north. Therefore, Chilean producers tended to have smaller operations and were less efficient. British owners were the most important in the sector, and among them John Thomas North was the largest. He owned or controlled large nitrate deposits and highly efficient companies compared to the average industry standards. He also controlled a railroad that almost monopolised the transport of nitrate; a company that supplied water needed for the production; a company importing goods from other parts of Chile and from abroad to supply nitrate communities; and a bank (Blakemore 1974: 35, 64). Over time, regional concentration, together with ownership concentration, produced a quasi-oligopolistic industry that facilitated the industry’s attempts to control the world price of nitrate (Cariola and Sunkel 1985: 199). The relationships between state authorities and nitrate exporters were of three types: conflictual from 1880 to 1895, roughly balanced from 1895 to the First World War, and state-dominated from the war to the Great Depression in the early 1930s. Consultation between state authorities and nitrate exporters was informal during the conflictive period, more organised and more frequent during the period of balanced power, and, finally, formalised in state–corporatist institutions during 4
Revenue from nitrate and iodine were not separated, but the majority was from nitrates. For example, in 1915, Chile exported 10,204 thousand QM (1QM ¼ 1,000 kg) of nitrates and about 709 thousand kg of iodine.
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Table 7.1 Chile: summary of characteristics of historical periods Periods
1880–95
Power relations Basis of of nitrate taxation producers and state Conflictive Informal bargaining and preferential taxation
1895–1915 Balanced power
1915–30
State has greater power
Resources exchanged
Outcomes (types of institutions created)
Taxes for property Independent nitrate rights producers’ organisations; incipient state institutions for dealing with producers Taxation Taxes for state National producer based on cartels; state fiscal policies consultation supporting the and technical and industry institutions to tax negotiation internally and and deal with abroad industry needs Unilateral state Taxes for less Nitrate producers’ decisions effective state organisations are support to the increasingly industry controlled and (unequal incorporated by the exchange) state
the state-dominated period. Table 7.1 gives a summary of the characteristics of each historical period, discussed more fully below. 7.4
Conflict between state authorities and mine owners (1880–1895)
During this period the nitrate mines that had been annexed from Bolivia and Peru were privatised, taxes were imposed on exports and Chile became the main world supplier of nitrate. The government managed to impose taxes by exchanging taxes for the recognition of property rights for territory that had previously been in Peru, and by rallying support for these taxes among powerful political and economic groups outside the nitrate sector. Contact between the government officials and mineowners was mostly hostile, and there were no formal institutional channels for consultation or negotiation. During this period, the policies and strategies of both government and the producers were unpredictable as they attempted to advance their interests. Neither was institutionally equipped to deal with the other.
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0.8
0.7
0.6
Percentage
0.5
0.4
0.3
0.2
0.1
0 1885
1895
1905
1915
1925
Year Imports Exports
Figure 7.2 Chile 1880–1930. Share of taxes on exports and imports from ordinary revenues Source: Mamalakis 1989: 198, Table 3.18
Taxes on the nitrate business were introduced soon after the Pacific War started. As Figure 7.2 demonstrates, the share of taxes on nitrate exports (and on iodine in a much smaller share) grew from about 4 per cent in 1880 to 48 per cent in 1890, and 58 per cent in 1894 (Mamalakis 1965: 184). Several factors account for the promptness in extracting taxes from the newly acquired mining resources. First, the state’s fiscal crisis and the fact that nitrate deposits were the spoils of war boosted the government’s legitimacy to impose taxes. Second, the group of nitrate owners was weak politically, because many of them were foreigners and they lacked strong connections to the formal power structure in Chile. This was not the case with several Chilean stockholders or owners of nitrate oficinas, who, as O’Brien (1979) shows, were politically well
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connected and used these connections to obtain tax exemptions and special concessions from the government. Third, the collection of taxes on nitrate exports was relatively easy and required a minimal extractive bureaucracy. The mines were concentrated in two regions, Antofagasta and Tarapaca, and the export took place through only a few ports. Last, but not least, the imposition of taxes on nitrate was accompanied by the abolition of some of the old taxes that had been imposed on land-owning elites and by passing control of other taxes to local provincial government (Bowman and Wallerstein 1982: 448; Mamalakis 1989: 196). Thus, the land-owning elites, who were well represented in Congress, and the provincial governments both supported taxation of nitrate owners. The fast and successful imposition of nitrate taxes took place in spite of substantial opposition from the nitrate producers. There were some efforts to bargain. For example, in 1879, before the War of the Pacific ended, the Chilean government established a tax of 1.50 pesos per 100 kg for all nitrate shipped from the Tarapaca region, which had been conquered from Peru. The producers refused to export nitrate and argued for a lower tax on the ground that international demand for the product was low. Yet, as we see below, the government not only maintained the tax but also increased it slightly, and the producers had to concede defeat. The Chilean government also faced resistance from the foreign owners of the nitrate-deposit lands seized from Peru. Peru had taken title to the nitrate lands (oficinas) in exchange for certificates issued to the owners, among whom were British and German mercantile houses. After Chile annexed the nitrate territory, the certificate holders used diplomatic pressure to ensure that their interests were fully recognised by the Chilean government (O’Brien 1979: 111, 114). In response, in 1882 the Chilean government decided to return the nitrate lands to private ownership, but to include them in a new scheme of taxation. In 1880 a uniform tax of 1.60 pesos per 100 kg of exported nitrate was imposed across the two nitrate regions. When the Chilean entrepreneurs, mainly in Antofagasta (which before the War of the Pacific had been part of Bolivia) protested against the tax, the government granted Chilean producers a 50 per cent tax exemption and promised to construct a railroad. It was expected that these measures would make Antofagasta nitrate competitive with that of Tarapaca, the most productive region, and the region dominated by British nitrate interests (O’Brien 1979: 117–18). Scholars agree that this tax of 1.60 pesos per 100 kg of exports, which was unchanged during the entire Nitrate Period of 1880–1930, was high and the most the industry could bear (Brown 1963; Cariola and Sunkel
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1985; McQueen 1924; Mamalakis 1971). The share of taxes in 1890 was about 43 per cent of the export value and remained at this level until 1900. The share of the tax declined to about 30 per cent of the value of exports after 1900, and in the 1920s it further decreased to 20 per cent (Cariola and Sunkel 1985: 155, 200). For the whole period (until 1924) the export tax averaged 33 per cent of the total value of exports, with the remaining two-thirds of the value equally divided between net profits and cost. Thus, according to Cariola and Sunkel (1985: 155), the Chilean state was ‘able to appropriate for itself approximately half of the gross profits engendered by the nitrate industry’. Most of the remaining profits, however, left the country, partly because a substantial share of the profits accrued to foreigners. Railroads and other businesses that provided goods to the nitrate region were also foreign-owned. An additional negotiated struggle between the central authorities and the owners of oficinas involved the creation of producer cartels called combinations. These cartels sought to control the production and exports of nitrate in order to increase prices. Because nitrate was used as fertiliser, it was subject to sharp fluctuations in world demand. When agricultural prices rose farmers could afford fertiliser and the demand for nitrate thus increased, but when agricultural prices fell the use of fertilisers fell. Given the periodic falls in nitrate demand and price, producers attempted to control production and export volumes in order to avoid price declines. These cartels tried to increase revenues by limiting exports. To varying degrees, state authorities opposed them.5 The first cartel was short-lived (1884–6) and soon faced problems of collective action. It was supported mainly by producers from the province of Tarapaca, which included the largest and most efficient English producers, and attained moderate success. Prices increased only in the second year of operation, and the cartel was dissolved because of infighting between the producers, and because world demand increased in 1887, raising prices. But, as prices decreased in 1889 and 1890, a second cartel was formed. This time, the cartel sought wider support from all producers, including the smaller Chilean producers on the west coast. This second cartel was bitterly opposed by President Balmaceda (1887–91). The President argued that reduction of output would decrease revenues, affect nitrate mine-workers negatively, decrease commerce, encourage the development of synthetic fertilisers and promote the formation of a foreign (i.e. an English) monopoly that did not have 5
Chile’s nitrate shared the characteristics that have made producers’ organisations of other raw materials possible. See, for example, Bates (1997) and Hallowell (1949) for coffee and tin producers’ organisations.
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Chilean interests at heart. Accusations of anti-Chilean interests became central to the government’s attack on the cartel and were repeated during the following decades. Both President Balmaceda and his successor, President Montt (1892–6), who held widely different political ideologies, referred to the cartel and their effect on revenues in nationalistic terms. In 1893 President Montt threatened to legislate against the cartel if nitrate output were substantially reduced. Furthermore, Congress approved the sale by auction of government-owned nitrate land in order to increase production capacity and undermine the power of the cartel (Brown 1963: 235). The auction of nitrate land weakened the cartel in several ways. Because buyers had a short period to pay for their properties, they were interested in fully working their deposits and selling the product rapidly (The Economist 1895: 87–8). This created incentives for the buyers to break the cartel’s arrangements to limit supply. Furthermore, the auctions provided a way for the government to promote the ‘nationalisation’ or Chileanisation of the nitrate industry. At least as far back as the Balmaceda administration, state authorities believed strongly that the Chileanisation of the nitrate sector would solve its major problems. At times only Chilean nationals could participate in the auctions; at other times, the government advanced credit for mine purchases only to Chileans. Producers and the government also bargained over the official concessions to build and operate railroads in the nitrate regions. The government’s interests in increasing output led them to oppose the private operation of railroads, particularly when private monopolies might lead to high transport costs and, potentially, limit exports. Colonel North had a concession to operate a major railroad in the province of Tarapaca, the Nitrate Railways Co., but producers complained to the government about high tariffs charged by the railroad, the only outlet for exports. High tariffs, they argued, limited exports and hurt producers because they depended on this railroad for transportation (Blakemore 1974: 151). The Balmaceda administration sought to break Colonel North’s monopoly by using a presidential decree to give a railroad concession to a rival British company. They also questioned in the courts the legality of the acquisition of more nitrate lands by Colonel North since this would increase his power within the industry. North countered by challenging in the Supreme Court the legality of the presidential decree that gave permission to build a rival railroad (Blakemore 1974: 141–3). Opposition to the second cartel and the legal challenges to railroad concessions and land acquisition reached a climax with a decision by the Supreme Court that the railroad dispute was beyond its jurisdiction and
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that Congress had to decide the issue. As senators split, with some supporting North and others supporting Balmaceda’s decision to break North’s railroad monopoly, the President closed the Congress. A major constitutional crisis followed. The battle between the central administration and the nitrate producers then fuelled the political struggle between the political factions associated with the executive and Congress that led to the civil war in 1890–1. The war ended with the defeat and death of President Balmaceda and with the institutionalisation of the Parliamentary Republic.6 Although the Balmaceda regime did not succeed in obtaining concessions from railroad owners, Nitrate Railways significantly lowered its tariffs in 1893 and 1894, after Balmaceda’s fall (The Economist 1897: 612). The conflictive bargaining between the nitrate producers and the central authorities focused on tax payment in exchange for property rights for the mines and the right to transport nitrate to the ports. At the start of the period, in particular, bargaining over tax rates was selective, conducted with only some producers, and favoured Chilean producers from less productive regions over the mainly foreign-owned and more productive miners in the north. When the producers’ cartel cut output to increase prices, and thereby reduced tax revenues, the central government challenged their property rights by questioning the legality and the property boundaries of their concessions. The government also issued decrees that changed the terms of the concessions, and sold new land deposits that would break the oligopolistic control of the nitrate industry. The government’s policy during this period was unpredictable and so were the producers’ strategies, as both attempted to increase their share of revenues and profits. Both sides forged alliances and used their influence to achieve that end. The government transferred to local government taxes on land to gain the support of landed groups for taxes on nitrate exports and justified taxation and other measures on nationalistic terms. Nitrate owners used diplomatic (British) pressure on the government to uphold old contracts and gain favourable new contracts to exploit and transport nitrate; they lobbied politicians and Congress. This power struggle was largely conducted within the context of existing institutions: contracts that allowed nitrate owners to profit from nitrate deposits and to build transportation networks, court challenges to some of those contracts, and taxes backed by the Parliament. Yet a new set of institutions began to emerge. Finance ministers and executive 6
The civil war has been the subject of different and controversial interpretations. In English two important alternative views can be found in Zeitlin and Ratcliff (1988) and Blakemore (1974).
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officials repeatedly contacted nitrate owners, both individuals and those organised in the cartel. The government also set up a new office in charge of supervising land auctions and enforcing property rights in the nitrate regions. After a brief upsurge in demand from 1893 to 1894, nitrate producers started talking about forming a new cartel. This time, however, the central government accepted the idea. Thereafter, it followed a period of closer collaboration between the state and the mining companies. 7.5
Balance of power (1895–1915)
Consultations and collaboration between state authorities and the mining companies took place during a period marked by the consolidation of the industry’s importance in the world market and by stable or growing exports at relatively high prices (Cariola and Sunkel 1985: 186). The latter was partly the result of the Chilean cartels that controlled production and exports, and partly due to increased global demand for nitrate. As production and exports (and also state revenues) became more predictable, the producers’ demand for state policies and services to help them became more predictable. State authorities continued to bargain the grant of property rights to nitrate owners (particularly the newer deposits) for tax payments. The government also cooperated with producers’ organisations in the control of the nitrate supply. In 1895, nitrate prices began to fall, sparking an industry-wide depression (Cariola and Sunkel 1985: 186). For the first time, the central administration admitted the need to regulate output. Some scholars suggest that this change was the result of the fact that the Chilean producers increased their importance in the international nitrate market, and – more than the foreign producers – gained considerable political influence in Congress and with the executive branch of government (Brown 1963: 238). The depression of nitrate prices deepened between 1898 and 1900 (see Figure 7.1), threatening the survival of many producers. Furthermore, it was now clear that after more than a decade of dependence on tax revenues from nitrate exports, government programmes were highly vulnerable to the cyclical nature of the nitrate industry. Public willingness to support the industry was reflected in a general recognition that the long-term interests of the industry and the government coincided. The third cartel (1896–7) was organised with government support, but the members failed to reach an agreement on export quotas, and prices continued to fall. Internal rivalry contributed to the dissolution of this association. As the depression deepened, the English producers proposed
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to create a centralised organisation to purchase nitrate from domestic producers and export it to Europe. They argued that the production restrictions had proved inadequate to increase prices. This proposal was rejected by the coastal producers (mostly Chileans) who feared that such centralisation would increase the monopolistic power of large, mainly English, producers. World demand started to revive by 1899 and a proposal for a fourth cartel (1901–5) was accepted by the producers and the government. The cartel operated in the midst of a nitrate boom partly created by increased use of nitrate in the United States (Brown 1963: 241). Although all producers benefited from the boom, the Chilean producers of the coast and others in the Antofagasta province increased their share of the trade. The number of producers increased, as did the share of the industry controlled by Chileans. By 1895, 6 per cent of the mining companies operating in Chile were Peruvian, 22 per cent Chilean and 60 per cent English-owned. Thirty years later, in 1926, only 1 per cent of the companies were Peruvian, 42 per cent Chilean and 41 per cent English (Bergquist 1986: 36). Regional rivalry between large, relatively efficient and mainly foreignowned mining companies in Tarapaca, and less efficient, smaller, newer and mainly Chilean producers became significant during the fourth and fifth cartels. High export prices increased the incentives to exceed quotas. This led to the collapse of the fourth cartel. However, a fifth was formed with the full support of the government, operating from 1906 to 1909. The government intervened because it believed that uncontrolled production would be followed by a fall in prices, which in turn would hurt the Chilean producers more than the foreign ones. Though this assumption is questionable, it led to the active mediation of government officials in the assignment of the production quota allotted to each producer (Brown 1963: 242–4). Producers suggested that the government assist them by investing in research to develop more cost-effective methods to extract nitrate (Ca´mara de Senadores 1913: 587). They also asked for subsidised credit for producers in distress, and for a reduction in the tax rate. Although the government refused to reduce the tax, it did begin to organise state institutions to support the nitrate business. An Office for Credit Assistance to Nitrate Producers provided loans at low interest rates to producers in need;7 and the national Delegacion Fiscal Salitrera (Nitrate Fiscal Office) was created to handle the broad needs and problems of the 7
The Minister of Finance reported in 1915 that the government gave loans at low interest rates to forty of the seventy-two firms that had requested such loans (Memorias de Ministro de Hacienda Anexo 1915: 421).
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industry. In practice, the main functions of this office were to demarcate property rights where there were land disputes between the government and individual entrepreneurs, and to help the government in auctioning nitrate lands.8 In addition, producers obtained financial support for advertising Chilean-produced nitrate abroad, and, in many cases, state officials provided brokerage in the formation of cartels. The increase in the number of producers, from 53 in 1895 to 137 in 1914 (Cariola and Sunkel 1985: 186), increased the difficulty of maintaining a cartel without government support. However, the government refused to support the sixth cartel, which lasted only from 1908 to 1909. This time, however, the state’s refusal to support the cartel reflected its greater concern with the long-term health of the industry. According to Brown (1963), the government’s move was motivated by the appearance of synthetic fertilisers in the world market. Policy-makers believed that restricting supply to support high prices through a cartel could jeopardise the long-term viability of the industry. By the onset of the First World War, the government’s involvement with the industry was irreversible. Producers’ demands for state policies to support the industry were mostly met. They began to depend on services provided by the state. In 1909 some nitrate producers suggested that the government should centralise nitrate sales (South American Journal 27 June 1909: 783). This proposal surfaced continually throughout the First World War, when the government participated in special arrangements to sell nitrate to an Allied buyers’ consortium (Memorias de Ministro de Hacienda Anexo 1919). Similar arrangements continued after the war. The government at times also advanced funds to pay the salaries of workers who were to be retrenched (South American Journal 19 September 1914: 220). In the eyes of producers, state services in the form of brokerage for cartels, advertisement and subsidised loans gave them some return for taxes paid, although complaints about the tax burden continued. In comparison to the previous period (1880–95), the closer collaboration between government officials and producers in the 1895–1915 years yielded a relative stability in prices and exports (Table 7.2). The coefficients of variation calculated for the three periods show that fluctuations in the volume of exports decreased in the 1895–1915 years, while fluctuations in prices remained closer to those existing in the first period.
8
In 1917 a Senator commented that there was ‘a tremendous struggle between the nitrate industry and the fisc’ and that the state was questioning every nitrate deposit title, obliging industrialists to incur the costs of defending them (Ca´mara de Senadores 1917: 215).
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Table 7.2 Chile: volume of exports: coefficients of variation Period
Prices
Exports (tonnes)
Total 1881–1895 1896–1915 1916–1930
0.29 0.14 0.16 0.27
0.48 0.32 0.27 0.32
Consultation and cooperation between government and producers during these years yielded greater control over nitrate. The state depended significantly on the volume of nitrate exports for revenue and was induced, reluctantly, to consult with the producers, even though many in the central government believed that the foreign owners of nitrate did not have Chilean interests at heart. Contacts between government officials and nitrate producers were frequent. Producers gained direct access to state authorities through various governmental departments (e.g. those responsible for enforcing land property limits where mines were located, tax collection, advertisement, etc.), and through cartels in which government representatives served as brokers. In addition, nitrate producers gained substantial political influence in Congress, where the importance of nitrate for the country’s economy was amply recognised. The industry’s interests were included, although still informally, in the broader democratic institutional frame of the country. 7.6
State-dominated taxation and limited representation (1915–1930)
The severe crisis in the industry that ensued with the First World War brought about great economic and political instability in the country, bringing an end to the growing cooperation between state officials and nitrate producers. Each side struggled to limit its own losses as profits and tax receipts both fell. The informal rules of bargaining, which had begun to solidify during the previous period, were broken by instability in the international markets. In addition, two military coups created unpredictability in policy-making. Government intervention was less effective, failing to bring much help to producers or to stabilise production. The First World War brought about a sharp decline in the demand for nitrate as a fertiliser (see Figure 7.1). In his annual message to the nation in 1914, President Barros Luco (1910–15) declared that the Chilean nitrate
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industry was surviving only because the state had provided subsidised credit to the producers, enabling the industry to maintain 40 per cent of its pre-war production (Ca´mara de Senadores 1915: 8). However, the demand for nitrate quickly revived because it became a component in the production of explosives. The volume of exports reached a record high in 1916 (Figure 7.1). But the bonanza stopped after the war ended, and the demand for nitrate as fertiliser never recovered. In 1919, the value of exports in real terms was only a fifth of that in 1918 (Figure 7.1). During the 1920s, the index of export prices fluctuated widely and in a downward direction. This was followed by fluctuations in import prices, and dramatic fluctuations in government revenues. Total ordinary government revenue (without loans), for example, was about US$153 million in 1918, US$96 million in 1920 and US$51 million in 1921 (Cariola and Sunkel 1985: 185). The coefficients of variation of exports and prices for the three periods (Table 7.2) give an indication of the volatility of exports and prices during this period. They show that prices were most volatile during the 1915–30 years, and that exports were also, especially with respect to the second period, highly unstable. Fear about the demise of the nitrate sector, together with the fiscal crisis, led the government to initiate a series of fiscal reforms, none of which initially affected the nitrate industry. The rates of existing taxes were increased, and new direct and indirect taxes were introduced, including a surtax on agricultural properties. However, since land was undervalued and numerous allowances were permitted, this never became a significant source of revenue (McQueen 1924: 15, 33). Other tax reforms followed, including the introduction of an income tax in 1926 by a military government. The industry crisis mobilised workers as well as owners, as many jobs were lost. In 1918 politicians fearing massive unemployment urged the establishment of a programme of public works (Ca´mara de Senadores 1919: 559). Unemployed workers in the north had to be moved to the south, in order to avoid starvation. After 1918, employment in the mines did indeed fall precipitously, particularly during the recession of 1920–2 when the labour force was reduced by half to 24,000 workers. In 1925 the labour force rose to over 60,000 workers only to fall again two years later to 36,000. By 1932 the industry employed only 8,535 people (Bergquist 1986: 29). Labour agitation, which had grown since a major strike in 1909, was now widespread. A state-dominated partnership between government authorities and nitrate producers was established with the creation of the National Association of Nitrate Producers in 1919 through a government decree. Four of its directors were nominated by the government. The association
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fixed the sales price for nitrate and provided centralised services, including advertising, research and statistics (Memorias de Ministro de Hacienda Anexo 1919; 1922: clxv). This was the first organisation of its kind where government officials and industry representatives formally worked together. Cooperation existed, yet it was constrained by a corporatist organisation that isolated nitrate producers from the competing claims of other economic groups, but also kept them apart from the formal political channels. This corporatist format was likely to inhibit the ability of nitrate producers to develop political alliances with other groups. Government participation in the Association gave it a great deal of leverage over the industry. First, the government gained access to inside information (Soto Ca´rdenas 1998: 168–71) and was able to make its own assessments of the industry’s needs. Second, government was able to undermine the potential collective power and influence of the nitrate producers by, for example, allying with more efficient producers who favoured a high-volume/low-price strategy and against less efficient producers who benefited more from a high-price/lower-volume strategy (Soto Ca´rdenas 1998: 175). During the 1920s, the government increased its involvement with the association. It helped producers handle their difficult labour relations, advancing money for wages, assisting with the standardisation of dismissal practices and stationing more troops in the nitrate region (Memoria de Hacienda 1925: cxiii). Government also negotiated with producers over production quotas, export prices and conditions for participation in the Association (The Economist 26 July 1919: 127–8; 19 February 1921: 326; 15 October 1921: 576–7). Congressional records of these years suggest that many producers recurrently asked the government to centralise nitrate sales, with the state as coordinator and buyer. Such centralisation would have required the government to advance capital for stockpiling and absorb cost differences between prices paid to producers and the international market prices. In the 1920s, some nitrate companies tried to revive the cartel: they stopped producing in order to decrease supply and increase prices. In response, the government threatened to impose new taxes on the companies that had stopped production and began to mention the possibility of nationalisation (Montero 1953: 71–3). Producers also complained that the government was managing to charge surtaxes on nitrate exports by manipulating the exchange rates at which taxes had to be paid (Ca´mara de Senadores 1917: 1474; 1919: 151). These manipulations stemmed from a 1917 law which stipulated that taxes had to be paid partly in gold and partly in paper currency, in proportions fixed by the president
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(Mamalakis 1971: 201). By 1924, the share of Chilean nitrate in the world market had declined to 35 per cent, from about 55 per cent in 1913 (Cariola and Sunkel 1985: 196). Pressures to reduce the export tax increased. Supporters of the industry pointed out that the tax rates in countries where synthetic nitrate was produced had been reduced in order to make it more competitive with natural nitrate (The Economist 24 July 1926: 153). However, the government continued to maintain the tax rate at 1.60 pesos per 100 kg of export. The industry experienced a brief recovery in the mid 1920s when a new method to speed up the extraction of nitrate was introduced. But the new technique was unable to revive the nitrate mines. Indeed, the number of mines decreased from ninety-six in the mid 1920s to twenty-one in 1930 (Collier and Sater 1997: 218). In response to the persistent crisis, the Ministry of Finance was reorganised in 1928 and the government created a Centralised Selling Corporation, which fixed a level of tax yield for the industry. After the fixed yield had been reached, the tax on additional exports would be reduced (The Economist 13 October 1928: 645). But even this reorganisation was not final. The major nitrate producer, the North American Guggenheim Group, continued to press for a lower tax in order to make Chilean nitrate competitive again. Military President Iban˜ez decided to go into partnership with the Group. This led to the establishment in 1931 of the Compania de Salitre de Chile (Collier and Sater 1997: 218). Half of the capital was provided by the state. The world economic crisis, however, led to a further change. In 1934, the Corporacio´n de Ventas de Salitre y Yodo (Corporation for the Sale of Nitrate and Iodine) was established. This gave the state ‘effective control of what was left of the industry, and 25 percent of all profits’ (ibid. 229). Thus, in the period after the First World War, the nitrate industry experienced a rapid decline that changed the balance of power between the owners and the state. The state was then in a more favourable position to carry out critical tasks that could potentially ameliorate the decline of the industry. This role also increased its capacity to exercise unilateral, largely un-bargained control over the industry. By playing on the economic divisions among producers, and allying with some against others according to the fiscal interests of the state, government officials were able at least to neutralise the political power of the producers. As Soto Ca´rdenas (1998) points out, from the 1920s onward, the government increasingly framed its interests and its policies towards the industry in nationalist terms. Attempts by producers to pursue independent strategies – like the formation of a new nitrate cartel in the 1920s – generated threats to nationalise the industry.
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Political interactions in this period were encapsulated in state-led organisations where members of the nitrate elite also were included. Undoubtedly, the National Association of Nitrate Producers, and other organisations that followed, required some degree of collaboration from both sides. Yet these organisations were increasingly controlled by the state, which limited the voice and bargaining power of the producers. Furthermore, the bargaining that did occur happened outside the Chilean representative institutions. Overall, relations between producers and the state moved away from meaningful bargaining and consultation, and towards unilateral and predatory taxation. 7.7
Conclusion
Taxation can generate political exchanges that entail bargaining and consultation if it is based on a sustained balance of power between taxed groups and state authorities. The type of revenue sources, the extent of revenue specialisation and of revenue stability, and the political resources of each in critical moments shape the nature of the tax bargain and determine whether it is based on consultation or on unilateral state power. In the Chilean case, three distinct periods illustrate this model well. Before the First World War, particular combinations of these factors produced, first, a period of conflictive bargaining, and then, a rough balance with more cooperation and consultation. After the First World War, this balance tilted towards the state, which acted unilaterally. In the first period, the type of taxation (natural resources) and the balance of political resources benefited state authorities. Taxing nitrate deposits was technically relatively easy and inexpensive. But producers also had some advantages: prices were relatively stable, and foreign producers were able to use diplomatic pressure to help balance the state’s strength. The authorities granted and protected mining properties, and made alliances with powerful groups by eliminating taxes on competing groups, mainly the large landowners, and by using a nationalistic ideology that mobilised workers and liberal segments of the ruling elites against nitrate owners, many of whom were foreigners. These conflicts in the industry impeded the development of smooth collaboration or consultation at first. They divided the industry and made effective collective action difficult. However, as the nitrate industry consolidated, several things happened. Producers’ cartels gained experience at working together to control the world supply of nitrates. At the same time, their taxes became extremely important for state revenues. A roughly balanced relationship with central authorities ensued. The state developed a vested interest in
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the success of the industry and nitrate producers became dependent on services provided by the state. Consultation and cooperation were relatively common and institutions that regulated that type of interaction started to emerge. After the First World War, external shocks altered the political balance between the taxed producers and the state authorities and their relative bargaining terms. Nitrate producers lost their ability to control supply, and prices for nitrate fell. Moreover, at the same time that producers called for state interventions to help the industry, state authorities feared its demise and the consequences of that decline on fiscal revenues. Thus, the state attempted to control the industry, developing state-controlled institutions in which consultation with industry representatives was insulated from the political system. There were consultations and formal representation, but these state-controlled organisations separated the industry’s claims from the formal broader democratic process and restricted, if not eliminated, the broader accountability that could potentially have followed from the insertion of tax-based consultations into the core of the political system.
8
Associational taxation: a pathway into the informal sector? Anuradha Joshi and Joseph Ayee
8.1
Introduction
The informal sector is large in most developing countries.1 It typically comprises most of the labour force. Equally typically, governments obtain little tax revenue from this sector and even less direct tax revenue. Those are statements of the obvious: exclusion from the tax net is a defining characteristic of informality. Is this a problem? Should governments be putting more emphasis on expanding their tax take from the informal sector? There is no consensus on the answer to those questions. Most professional tax specialists tend to be sceptical on pragmatic grounds. Why chase after a sector where the direct costs of collection will be high in relation to the revenue raised, and where the costs of compliance might weigh heavily on the taxpayers themselves? The sceptical policy prescription, which accords closely with the advice emanating from influential organisations such as the International Monetary Fund (IMF), is to focus on the shorter term and on large individual taxpayers. In the longer term, it is expected that indirect taxes, especially the Value Added Tax (VAT), that has been introduced into most countries over the last three decades,2 will gradually insinuate themselves deeper and deeper into the informal economy.3
The research reported here was supported by the Centre for the Future State at the Institute for Development Studies, Sussex. Roshni Menon provided invaluable research assistance. We are grateful for comments from participants at the workshop on Taxation and Accountability, Copenhagen, April 2004, where this material was first presented. All errors and omissions remain with the authors. 1 The term ‘informal sector’ is much debated and contested. For a recent discussion of the definition, see Gerxhani (2004). In using it here, we recognise that it covers a very wide spectrum of activities, some more and some less informal. 2 VAT was in place in 8 countries in 1969, 24 countries in 1979 and 123 countries by April 2001 (Ebrill et al. 2002: Table 1). 3 Recent evidence suggests that in poorer countries VAT is not proving to be a great revenue-earner: the poorer the country, the less effective has VAT been, over the period 1975–2000, in replacing government revenues lost by reducing import and export taxes (Baunsgaard and Keen 2005).
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Proponents of more focused attempts to extend taxation to the informal sector make an equally pragmatic argument: in so far as economies of developing countries are becoming increasingly informalised, policymakers will have to find ways to tax this sector if the formal sector is not to bear an oppressive burden. However, much of the case for focusing on the issue stems not only from policy pragmatism, but also from a longer-term political perspective on the taxation relationship. Taxing the informal sector more effectively might help make governments more legitimate, and enhance the positive relationship of taxation and accountability that is at the heart of robust democracies (see Chapters 1 and 2 of this volume). However, even proponents of taxing the informal sector more do not agree on how best to do it. This is not surprising: the informal sector is complex and heterogeneous. It comprises large and small enterprises, urban and rural firms, owners as well as workers, and local activities as well as those that cross jurisdictional boundaries. No single tax policy tool is likely to fit such a diverse grouping of activities. The standard literature on taxation of the informal sector is not very helpful: it has tended to deal with issues of taxability in narrow technical terms. Here we argue for a more explicitly political approach, drawing upon the realities of the informal sector and examining the processes through which informal sector actors interact with the state around taxation. We start from the broad proposition that the prospects for extensive, sustainable taxation of the informal sector will be much improved if they are products of negotiation between the state and associations representing the sector. More specifically, we suggest that effective taxation of the informal sector is more feasible when two main sets of factors are in place: (a) strong fiscal pressure on governments to increase revenues, and (b) the existence of collective actors in the informal sector who have institutionalised channels for negotiation with the state. The associational taxation in our title is defined as a system in which associations representing informal sector actors are centrally involved in forming and implementing tax policy towards the sector. The idea of associational taxation was sparked by our research into a case of relative success in Ghana (Joshi and Ayee 2002). Since 1987, the Ghanaian government had delegated the responsibility for collecting income tax from informal passenger transport operators to their unions, primarily the Ghana Private Road Transport Union (GPRTU). This arrangement has been relatively successful in increasing revenues. Although the role of the GPRTU in tax collection originated in the politics of its corporatist relationship with the non-democratic governments led by Jerry Rawlings between 1981 and 2000, the
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arrangement continued under the successor government of the New Patriotic Party, and at present covers twelve associations in the informal sector. We found literature on two other cases – from Senegal and Peru – that helped refine and support our ideas about both the potential for associational taxation and the constraints on it. In these cases, associations played a central role in negotiating taxes with governments. However, the existence of associations alone was not enough. Our exploration of the conditions under which associational taxation could take root helps point to hypotheses that could be tested through further research. The aim of this chapter is to urge more explicitly political research and thinking into the question of taxing the informal sector. Our case materials and arguments are limited to the urban informal sector. It is this sector that has witnessed high rates of growth in the past few decades and constitutes the most fertile ground for both the extension of revenue raising and the creation of associations. Parts of it also have considerable potential political influence due to its capacity to disrupt important public services. In Section 8.2 we present reasons why direct taxation of the informal sector is important. In Section 8.3 we explain why the informal sector tends to be under-taxed. This sets the stage for the conceptual framework highlighting our key propositions in Section 8.4. In Section 8.5 we explore the framework against the experience of our three cases: Ghana, Senegal and Peru. The lessons from comparing these cases and the broader literature are drawn in Section 8.6. In conclusion, in Section 8.7 we suggest that the outlook for taxation of the informal sector might not be as bleak as the prevalent literature and sceptics suggest. 8.2
Why tax the informal sector directly?
For scholars working on tax policy, the issue of taxation of the informal sector has generally not been of much interest.4 It has been considered too difficult, requiring considerable effort with few returns. Rather, the focus of tax reforms over the past twenty years has been on simplifying tax systems, widening the tax base through the introduction of VAT and improving tax administration, partly by creating autonomous tax authorities (Bird 1992; Goode 1993; Taliercio 2003; Tanzi and Zee 2001). The
4
A recent conference on ‘The Hard-to-Tax Sector’ at the Andrew Young School of Policy Studies, Georgia State University, Atlanta, Georgia, 2003, is among the exceptions. Yet, the informal sector is only one of three categories defined there as ‘hard-to-tax’.
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neglect of the informal sector is not surprising in contexts where governments lack good instruments for taxing, and where much of the emphasis is on extending indirect taxation (VAT) that is expected eventually to penetrate the informal sector. Similarly, taxation has not been of principal concern to scholars working on the informal sector. The focus of attention has largely been on understanding the longevity of the sector, its contribution to the economy and its connections with the formal sector (Gerxhani 2004; Peattie 1987; Portes and Sassen-Koob 1987). Until recently, the idea of taxing the informal sector might have been considered an oxymoron as one of the key definitional features of informal activities is the ability to avoid taxes. Further, it is often argued that taxation would choke the very dynamism of the informal sector that its proponents thought the government ought to be supporting (Sanyal 1996). Why then should we pay more attention to the direct taxation of the informal sector? At least six factors seem important: 8.2.1
Revenue needs
Research suggests that losses from not taxing the informal sector could amount to 35–55 per cent of total tax revenues in some countries (Alm and Martinez-Vasquez 2003; Terkper 2003). The conventional package of tax reforms does not directly address the issue and has largely failed to make significant inroads into the informal sector (Smith 2003; Stiglitz 2003). The obvious challenge for governments then is to tap into this potentially large revenue source, while simultaneously keeping the costs of collection low. 8.2.2
Growth of the informal sector
The informal sector is growing, absolutely and relatively. While the exact figures are debated, there is no controversy that the informalisation of the economy is occurring in most poorer countries. For example, it is estimated that the informal economy in Malawi has grown from about 7 per cent of GDP in 1972 to 39 per cent in 1990 (Chipeta 2002). Recent calculations for developing countries suggest that the informal sector varies from between about 20 per cent of GDP in Indonesia to around 67 per cent in Bolivia; and that it accounts for over 40 per cent of GDP in twenty-four of the fifty-five countries for which we have estimates (Alm and Martinez-Vasquez 2003). If the process of informalisation continues, governments seeking revenue need to pay it more attention.
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Impact on tax compliance in the formal sector
Research suggests that formal sector taxpayers perceive the state as being unfair in pursuing them for taxes while the informal sector continues to operate untaxed. Ignoring informal sector activities lowers morale and increases the risk of low tax compliance elsewhere (Terkper 2003). There is evidence from Latin America suggesting that tax compliance in the formal sector is higher in countries which have a relatively small informal sector (Torgler 2003). Governments interested in raising the tax take from the formal sector increasingly need to take such perceptions into account. 8.2.4
Demands from the informal sector
Ironically, evidence suggests that the informal sector itself is not as averse to taxation as we might expect. Some research shows that tax evasion is not the primary reason for being informal (Friedman et al. 2000).5 Avoiding costly regulation may be a more powerful motivation (Ngoi 1997; De Soto 1990). On the basis of survey data, AraujoBonjean and Chambas (2003) suggest that non-compliance in the informal sector often results from ignorance of tax legislation or the complexity of the tax system rather than from deliberate evasion. Some research shows that informal sector operators are willing to pay taxes, specifically when these are in exchange for some legitimacy, predictability and protection from arbitrary harassment from state agents (Baross and van der Linden 1990; Dickovick in press; Roever 2005). Formal taxes might be less costly than the bribes extracted by public officials on ‘informals’. 8.2.5
State legitimacy
Those who operate in the informal sector have, by definition, at least partly disengaged from the state, and may see little value in re-engaging, even for the protection of life and property. Thus, we see the emergence of vigilantism in cases where the state is unable to curb violence (Hllela 2003). In countries where more than half of the population is engaged in informal activities, state legitimacy is at stake. Broadening the tax base and developing a ‘culture of compliance’ can achieve more than simply increasing revenues; it can be a way of re-engaging citizens with the state. 5
This is not to suggest that the profitability of informal sector activities is not higher due to the non-payment of taxes.
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8.2.6
Links between taxation and accountability
As discussed elsewhere in this volume, there is an argument that governments which are dependent upon ‘earned’ revenues such as taxes (as opposed to ‘unearned’ revenues such as aid or mineral wealth) are more likely to be responsive to their citizens, and that citizens who pay taxes might demand more responsive governments. To the extent that these arguments are valid, drawing ‘informals’ into the tax net can stimulate a constructive engagement with the state – of making claims and realising rights. However persuasive they may be, these reasons for paying more attention to direct taxation of the informal sector do not tell us how to do it. The literature offers some useful pointers, but, as we see in the next section, it is dominated by discussions of why the sector is lightly taxed.
8.3
The informal sector is under-taxed
In general terms, it is obvious why it is difficult to tax the informal economy. It comprises a large number of small-scale operators, each with low turnover. Many activities are carried out within homes and out of public sight; it may be difficult to identify them for tax purposes. Barriers to entry are low. This leads to fierce competition and a high degree of transience and uncertainty. Businesses in operation today may not exist tomorrow. In activities such as transportation or street vending, operators may be very mobile. Low levels of literacy and lack of access to banking services mean that cash transactions dominate. The familyoriented, small-scale nature of most businesses leads to a lack of separate accounting of personal and business transactions. Affordable accountancy services are rare. More specifically, we can identify four interacting reasons why governments tend not to put much effort into raising revenue directly from the informal sector: high collection costs, capacity constraints, the incentive problem and the ‘devil’s deal’. 8.3.1
High collection costs
Especially when tax collection agencies work through formal systems of accounting and income calculation and formal payment channels, they will find that collection costs tend to be high in relation to the amounts collected. In their recent attempts to overcome these problems, governments have worked on both indirect and direct taxation mechanisms. International institutions have placed most emphasis on the virtues of extending the indirect tax system. In recent decades it has been
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conventional wisdom that indirect taxes such as VAT can improve efficiency, reduce disincentives to formal activity, raise revenue rapidly, simplify tax administration procedures and widen the tax base. In particular, much effort has gone into converting a regime of sales and turnover taxes into a less distortionary VAT system, even though this has sometimes led to demonstrations and violent confrontations.6 More significantly for the present discussion, in many countries VAT has not been able to penetrate informal sector activities.7 Taxation based on formal systems of income calculation, accounts and payment options is not appropriate to much of the informal sector. Direct presumptive taxation may be more promising. In presumptive systems, assessments are based not on calculations of actual income, but on broad indicators of the scale of profits likely to be made (Bird and Wallace 2003; Chipeta 2002; Sadka and Tanzi 1993). Depending on the nature of the economic activity, the indicators may be the size and capacity of machinery, the square footage of commercial space, the number of employees or the number of customers served. Presumptive taxation has been introduced widely in the developing world, e.g. in Bolivia, Uruguay, Angola, Cameroon, Morocco and Uganda (Bird and Wallace 2003), usually in combination with the simplification of self-assessment systems. Bolivia changed its tax code in the mid 1980s and introduced a presumptive tax in the form of a 3 per cent levy on estimated net worth of business assets. Mexico did something similar in 1988, identifying 140 activities for presumptive taxation (Wallace 2002). Ghana has had a form of presumptive tax since the early 1980s (Terkper 1995).8 While presumptive taxation has met with some success, it too has failed to penetrate the informal sector adequately and the returns to efforts have been low. 8.3.2
Capacity constraints
Although the introduction of VAT and presumptive income taxes might ease the assessment and collection processes, there is still a need for effective tax administration. The tax bureaucracies of many developing 6 7
8
For example, in Ghana VAT was initially withdrawn after it led to riots and was later reintroduced (Ayee 1997). The standard measure of the effectiveness of VAT collection is the ‘C-efficiency ratio’: the ratio of revenue from VAT to the value of total consumption in the economy, divided by the standard rate of VAT. In 2001, the average C-efficiency ratio was around 64 per cent in Europe, but only 38 per cent in sub-Saharan Africa (Ebrill et al. 2002: Table 2). Although the South African Revenue Services (SARS) has had considerable success with VAT, it has been unable to reach the informal sector (Smith 2003: 19). This included informal food-sellers, hairdressers, butchers, automotive garages and market traders.
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countries do not have adequate capacity (Bird and Casanegra 1992; Kiser and Baker 1994; Magana, Lynn and Mendive 1965; Stella 1993). Some have responded by experimenting with (a) tax farming, in which the right to collect taxes is auctioned off to a private agent in exchange for a fixed sum payable in advance; or (b) tax sharing, in which private agents collect taxes, with a right to keep a share of the total collection (Toma and Toma 1991). Tax farming and sharing are justified as ways of reducing administrative costs while increasing the level and the reliability of revenues. Critics argue that tax farming and sharing do not avoid the costs of creating a tax bureaucracy. The costs are incurred in the private sector and passed on to the state (Azabou and Nugent 1988, 1989; Stella 1993). In Tanzania and Uganda, the outsourcing of tax collection in some local government authorities has improved revenue collection considerably, but at the cost of simultaneously increasing corruption (Bahiigwa et al. 2004; Kobb 2001). Moreover, tax farming and tax sharing do not automatically maximise revenues for the state in cases where no competition exists, where tendering cartels prevail or where auctioneers collude with bidders. On the contrary, they can lead to overzealous collection and exploitation of taxpayers. Privatisation options may be unattractive and fail to overcome the basic problems of high costs of collection, monitoring and enforcement of informal sector taxes. 8.3.3
The incentive problem
Not only may tax agencies be overstretched, but also, typically, their staff may try to avoid working on the informal sector. Compared to virtually all alternatives, including corporate taxation or customs and excise, working on the informal sector is relatively low status, unrewarding and sometimes even dangerous. Patrolling poorer areas to identify tax evaders and monitor tax payments with nowhere near the required level of resources is a thankless task. In particular, educated tax officials dislike interacting with illiterate, poor and sometimes violent citizens who resent being harassed for taxes when they are attempting to eke out a meagre living. The scope for corrupt supplementation of earnings is low relative to other types of postings in the revenue service, and corruption typically will imply taking money in small amounts from people who are clearly poor. Our research in Ghana revealed low work motivation among tax officials assigned to work with the informal sector. Such work tends to be low profile, offers few promotion prospects and is regarded as not being ‘professional’. It is avoided, especially by the more senior officials. In such circumstances, it is hard for governments to focus more on taxing the informal sector.
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The ‘devil’s deal’
Where there is electoral competition, the informal sector can form a substantial vote bank (Baross and van der Linden 1990; Cross 1998; Tendler 2002). It can often resist taxation quite effectively through collective action, especially when politicians collude in what Tendler calls the ‘devil’s deal’ – an unspoken arrangement between politicians and the informal sector operators: ‘ if you vote for me . . . I won’t collect taxes from you; I won’t make you comply with other tax, environmental or labour regulations; and I will keep the police and inspectors from harassing you’ (Tendler 2002: 99). Public officials and politicians are willing to turn a blind eye to informal activities in order to retain their support base. Simultaneously, organised informal sector operators pressure government officials not to enforce taxation. This dynamic is more likely to operate where the informal sector forms a substantial and growing part of the economy and where informal activities are clustered in electorally important localities. Once the devil’s deal has been made, it may be difficult to break. Informal sector firms like the universalist, burden-reducing support that it implies; state officials can continue engaging in petty corruption; and politicians are unwilling to take the risks associated with other strategies for gaining electoral support or encouraging economic growth in the informal sector. We do not have detailed insights into where and how such deals operate. Indeed, we still know little about the politics of the informal sector in general, let alone the specific issue of taxation.9 However, the notion provides yet another plausible explanation of why governments often are unable or unwilling to tax the informal sector directly. 8.4
A conceptual framework
The associational route – negotiated taxation between informal sector associations and government – offers the prospect of more effective taxation of the informal sector through three related mechanisms: First, because of the difficulties of taxing the informal sector, and the consequent high potential for evasion, taxation regimes are more likely to be cost-effective and sustainable if imbued with legitimacy and credibility through a negotiation process. Individual taxpayers are likely to be more 9
Sanyal’s comment (1991: 39) more than a decade ago continues to be relevant: ‘The voluminous research on the urban informal sector (UIS) has centred on analysing the UIS as an economic entity: of its politics we still know little . . . Neither do we know about the politics of its external relationships with the government, with established political parties or with organized labour in the formal sector.’
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willing to pay, and associations more likely to encourage members to comply. Second, the use of associations as collection agents can help overcome the potentially high costs of collecting taxes from a myriad of small, diverse enterprises. Bringing tax collection to the door of the informal sector taxpayer makes it possible to reduce administrative costs (fewer forms, less waiting, etc.) and to sequence payment obligations to suit taxpayers’ needs. Informal sector operators, like borrowers in microfinance schemes, find it easier to pay small amounts regularly rather than larger sums at longer intervals. A system of regular, small transactions is better administered by membership associations that have a greater understanding of the behaviour and constraints of members, rather than by the more distant and formal public bureaucracies. Third, the collection of taxes through legitimate associations, which aggregate the political power of many small but individually powerless individuals, increases the chances that taxpayers will be able to negotiate with the state – over the delivery of services or other issues – and to a degree hold the state accountable. Our hunch about the importance of associations in taxation is consistent with a related literature: the role of collective action and collective bargaining with government in enabling clusters of small firms, many of whom operate within the informal sector, to meet major economic threats (e.g. the imposition of import bans by customer countries, or competition from cheap imports).10 Rather than exempting firms from taxation or offering other clientelistic benefits, governments have offered collective support to upgrade technologically and to access distant markets (Tendler 2002). Central to these stories of successful adaptation and formalisation are associations of small firms that make possible collective negotiation with the state. By pooling information and reducing transaction costs, associations have helped firms upgrade to meet global standards, upgrade accounting systems and innovate through collective learning. To assess our Ghana-based propositions about the role of associations in direct taxation of the informal sector, we searched for other relevant literature. We found two other cases, from Senegal and Peru.11 We use the three cases to explore ideas about the political conditions that make possible 10
11
There are other strands of literature that emphasise the importance of organisation and associations in the informal sector, for example for labour (ILO 1998, 1999) and for governance (Goldsmith 2002). We rely heavily on Thioub, Diop and Boone (1998) on Senegal; and on Dickovick (in press) on Peru. Neither focuses explicitly on taxation, but in each case it formed a significant part of the story.
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associational taxation of the informal sector. Our central hypothesis is that the resolution of political issues around the collection of taxes in the informal sector depends on two factors: the extent of pressure on the government to raise revenues, and the degree and type of collective action in the informal sector. Most governments in developing countries feel a need for additional revenues. We suggest that it requires a fairly serious fiscal crisis to motivate governments to make a major effort to overcome the obstacles to taxing the informal sector.12 How do we recognise and define serious fiscal pressure? At a minimum, this would involve some combination of a large fiscal deficit, a significant drop in the overall tax take, high inflation and international pressure to tackle the situation. In addition, we suggest that the larger the urban informal sector as a share of GDP, the greater will be the incentives for governments to try raising more revenues from it. The mere existence of informal sector associations is not enough. Experience indicates that, if there is to be negotiation with the state, institutionalised channels are needed.13 In some countries, governments have established corporatist arrangements with powerful informal sector associations. In others they permit the participation of the informal sector in deliberative forums such as Chambers of Commerce. Whatever their precise form, channels of interaction play a key role in the negotiation process. The representativeness of the associations and the degree of internal democracy are also important. To the extent that associations do not represent member interests, and their leaderships do not enjoy widespread support and legitimacy, any arrangements they negotiate are likely to be fragile. Our central hypothesis is that the potential for extending taxation of the informal sector in a sustainable way depends on (a) the revenue imperative facing the government, and (b) the extent to which the informal sector is organised collectively and has credible institutional channels for negotiating with the state. We can represent this in the form of a matrix (Table 8.1), within which we can locate our three cases. Our more precise hypotheses follow. In situations where the informal sector is unorganised 12
13
In his exploration of the determinants of levels of taxation in developing countries, Cheibub (1998) found that the overall fiscal situation was not statistically significant. This finding is not inconsistent with our hypothesis: in the short term, the results of attempts to raise more revenue from the informal sector are unlikely to have much impact on national taxation levels. In some contexts, political parties have played this role (Cross 1998). Yet, there are drawbacks to relying on political parties alone, particularly in contexts where competition prevails in the political and the associational sphere.
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Table 8.1 Environmental influences on associational taxation Extent of revenue imperative
Extent of collective action and credible negotiation channels
Low
High
Low
A
High
C (Senegal)
B (Peru) D (Ghana)
and pressures on the state to raise revenues are low, taxation of the informal sector remains a distant possibility (Cell A). When pressures to raise revenues are high, the informal sector is unorganised and there are few channels for negotiation, the government will attempt to impose taxation regimes – with varying degrees of compliance dependent upon state capacity to enforce policy (Cell B – Peru). When the informal sector is organised with well-institutionalised channels of negotiation, and when the pressure on the state to raise additional revenue is low, it will be difficult for the state to impose taxation (Cell C – Senegal). When both revenue pressures and organisation are high, there is more likely to be a practical compromise on means and levels of taxation (Cell D – Ghana). In the light of this framework, we can examine in greater detail our three cases of attempts to tax the informal sector. 8.5
Three cases: Ghana, Senegal and Peru
8.5.1
Ghana
The growth of the informal sector in Ghana parallels that of several other countries (Lugalla 1997; Tripp 2001). Economic decline, urbanisation and liberal economic reforms increased the size of the informal sector considerably in the late 1970s and 1980s. The Economic Recovery Programme that followed the economic crisis of the mid 1980s was particularly favourable to certain sectors, in particular road passenger transport. The lifting of most controls on passenger transport fares, the increased availability of imported spare parts and the massive rehabilitation of the road infrastructure led to a big expansion in the private passenger transport sector.14 Other parts of the urban informal 14
Between 1984 and 1991, the number of private passenger transport vehicles increased on average by 20 per cent per year (Fouracre et al. 1994).
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economy – street vendors, small-scale manufacturing and service sector micro-enterprises, etc. – also flourished (Widener 1991). The 1981 military coup had brought to power the Provisional National Defence Council (PNDC) led by Jerry Rawlings, and had effectively suppressed party political competition. Within the informal sector, the extent and nature of previous political activities and organisation had varied. There was a long history of activism in the transportation sector and among market traders, and very little in food vending and hairdressing. Between 1981 and 1985, the period of the ‘Rawlings revolution’, the informal sector became more organised. In particular, the largest road passenger transportation union, the Ghana Private Road Transport Union (GPRTU), representing vehicle owners and operators, became a powerful economic and political actor.15 Its membership grew, and it enjoyed close relations with Rawlings and the PNDC, especially through its new General Secretary, Kofi Aikins. The relationship between the GPRTU and the PNDC was essentially corporatist. The GPRTU was an important political actor because of its size, its organisational base in every village and district, its ability to support or sabotage election campaigning through control of road transport, and its capacity to paralyse the Ghanaian economy if it chose to go on strike. The PNDC granted the GPRTU sole control over the lorry parks that were the strategic hubs of the road transport network; the sole right to employ guards empowered to check violations of the Road Traffic Act; subsidies on imported items such as spare parts; and loan guarantees for the import of vehicles. In turn, the GPRTU supported the PNDC through various overtly political activities. By 1993, Ghana had made a transition to formal democracy and Rawlings was returned to power in a general election, although the ‘fairness’ of the election was disputed (Nugent 1995). The fiscal crisis of 1983 had put the government under great pressure to raise revenues and broaden the tax base. As part of the economic reforms of 1985, the Ministry of Finance underwent restructuring and two new autonomous revenue authorities were created: the Internal Revenue Service and the Customs and Excise and Preventive Service. The objectives of the restructuring were to bring taxation closer to the taxpayer, decentralise operations to enhance taxpayer identification and to develop new policies that addressed issues of compliance within the informal sector (Terkper 1995).
15
In 2001, the GPTRU had about 55,000 members. About 60 per cent of them were vehicle owners, mostly owner-drivers, and around 35 per cent employed drivers.
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The PNDC ensured that the Internal Revenue Service (IRS) consulted the GPRTU about these reforms in a series of meetings held in 1986. Presumptive taxes, which had been introduced before without success, were to be the basis of revenue raising from the informal sector. Negotiations between the IRS and the GPRTU highlighted some of the issues that needed to be resolved and also pointed to possible solutions. The GPRTU leadership was not against paying direct income taxes, partly because its members were harassed by the police and often ended up paying bribes anyway. Rather it pointed out the problems with the old presumptive tax system: based on a standard assessment and payable at first annually and later quarterly, it was highly unsuitable for small-scale road transport operators. Often working on a day-to-day basis, operators found it hard to pay occasional lump sums. The standard assessments took no account of vehicle breakdowns or workdays lost for other reasons, such as illness. There was also a problem with corruption in the Vehicle Licensing Office, which issued the Road Worthiness Certificates required when taxes were paid. The process of paying itself required a whole day at the tax office. For these reasons, tax administration, collection and enforcement under the old system had been very problematic. Out of these consultations a new system of presumptive income taxation – Identifiable Grouping Taxation (IGT) – was born. This involved using the informal sector unions as collection agents. The unions had detailed knowledge of the activities of their members and could collect taxes without much effort. The scheme was relatively easy to administer. Taxes were collected at the lorry parks, which were under the control of the unions. Operators were liable for taxes only on the days they actually worked. Taxes were initially collected daily and then, to save on the costs of printing receipts, weekly. The union was offered a 2.5 per cent share of the total collection. The passenger road transport sector was by far the largest of the thirty-two informal sector activities for which the IGT system was introduced. The arrangement was relatively successful in increasing the revenues generated from the road transport sector. At least initially, it survived the democratic transfer of power to the opposition New Patriotic Party in 2000. However, the new government had to address the concerns of rival unions in the transportation sector. They expected the New Patriotic Party to act against the monopoly of the GPRTU, which had been closely identified with the previous government. Since 2000, there were allegations that, although efficient at collecting the taxes from its members, the GPRTU was less efficient at handing the money over to the government. There were also problems with some of the other unions, including the butchers union and the market traders union, who were operating the
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IGT system. Informal sector unions were seen as havens for large enterprises to avoid paying their full liabilities by claiming to be within the informal sector. To resolve these problems, in 2003, the IRS abolished the collection arrangement with the GPRTU and introduced a new system of Vehicle Income Tax stickers. This required quarterly payment of taxes, individually and directly to the IRS. The new system has raised revenue levels but has been resisted by the GPRTU. For the other informal sector unions (e.g. the hairdressers union or the ‘chop bar’16 association), the IGT system remains in place. The Ghana experience suggests that the collection of presumptive taxes through associations might be an important step in the long path towards more standardised tax collection through public sector revenue agencies. There is, however, an irony about this case: the close political relationship between the GPRTU and the PNDC, both dominant political actors in their respective arenas, made the IGT system possible in the first place, but was also the source of pressures to discontinue it once the PNDC lost power. 8.5.2
Senegal
The case of Senegal parallels that of Ghana in many ways. The growth of the informal sector in Senegal has its roots in the rising inflation and reduced profitability of agriculture in the 1970s. For survival, a significant number of people took to importing contraband, petty trading and transport. The government turned a blind eye because this enabled people to cope with high inflation and economic recession. However, informal sector enterprises became very competitive because they escaped a host of taxes and regulations that burdened formal businesses. By the mid 1980s, a stagnant economy, exacerbated by the persistent drought, growing debt and continued balance of payments problems, led Senegal to undertake the economic reforms advocated by the World Bank and the IMF. Subsequent trade liberalisation and privatisation changed the nature of the economy. The foreign capital that had previously been dominant, and Senegalese businesses that had thrived through clientelistic relations with the state, were both overshadowed by the growth of the informal sector (Thioub, Diop and Boone 1998). By 1991, the informal sector was estimated to account for about 41 per cent of GDP (Kuchta-Helbling 2002). Formal business associations, mired in corporatist relations with the state, had been weakened through the
16
‘Chop bars’ are small roadside food stalls.
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recession. Simultaneously, new incentives in the form of opportunities to negotiate the content of structural adjustment programmes motivated the growing informal sector to invest in organising and vocalising their demands. A new business association representing the informal sector – Union Nationale des Commerc¸ants et Industriels du Se´ne´gal (UNACOIS) – emerged and became a powerful political force in the 1990s. UNACOIS, with around 70,000 members, was led by a group of powerful indigenous Senegalese businessmen who had made their fortunes in informal sector trade. While autonomous from the state, UNACOIS was not a model of internal democracy. Leaders were linked to the members through commercial dependencies and personal ties. Its political power came from its capacity to mobilise rank and file members. In 1989, for example, UNACOIS organised protests against the extension of the VAT and was able to paralyse business activities in Dakar. The government ultimately capitulated to its demands. Simultaneously and equally significant, UNACOIS recognised the importance of channels of negotiation, and it took control over institutions that formally linked business with government, e.g. the Dakar Chamber of Commerce or the Conseil Economique et Social. Yet, unlike the GPRTU in Ghana, UNACOIS did not identify itself closely with any political party. UNACOIS took up two issues in particular: it supported economic liberalisation and the breaking up of large state-controlled monopolies; and it opposed the extension of indirect taxes to the informal sector. The introduction of the New Industrial Policy in 1986 was followed by a dramatic fall in import tax receipts. The Senegalese government was under some pressure from the Bretton Woods institutions to increase revenue collection. From 1989, the government made a series of attempts to extend the application of the VAT to informal sector commerce. It increased the rate in 1989, and between 1991 and 1995 it redefined categories of those obliged to pay and simplified payment procedures. Each of these measures was a catalyst for a strengthening of UNACOIS and organised resistance through a combination of strikes and rallies. UNACOIS justified its stance in terms of maintaining the ‘fragile socioeconomic stability’ and financial precariousness of thousands of its members (Thioub, Diop and Boone 1998: 76). It was, however, willing to consider an income tax based on standardised annual assessments. Some observers have argued that such continued exemption of the informal sector from taxation formed part of the new political deal of exchanging rents for political support (Boone 1994). By 1998, however, this political deal was under threat: fiscal pressures on the state had risen and
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UNACOIS was under pressure to give up its demands for tax exemption for the informal sector.17 In Senegal, unlike in Ghana, the association of informal sector operators was never closely connected with the government or any political party. Given the less serious nature of the fiscal crisis and its own organisational strength, UNACOIS was able to resist attempts at extending taxation to the informal sector. 8.5.3
Peru
Unlike the previous two cases, our material from Peru deals with taxation initiatives by local governments. Since the mid 1970s, Peru has been widely cited as one of the classic cases of the growth of the urban informal sector. It was the focus of Hernando de Soto’s well-known book, The Other Path (De Soto 1990). The inefficiencies of the Peruvian state burdened small business with numerous regulations and led a significant proportion of small entrepreneurs to operate in the informal economy, evading regulation and taxation. A growing informal sector, existing outside the tax net, set off a vicious circle in which more regulations and taxation were imposed on the shrinking formal sector. This trend intensified in the 1990s when, as a result of liberalisation policies, unemployment rose and a large number of people entered the informal streettrading and urban transport sectors. A recent estimate by the International Labour Office (ILO) suggests that over 60 per cent of Peru’s economy is informal (Tokman 2001). The fiscal crisis reached a peak at the end of the 1980s. The fiscal deficit had grown from 3.9 per cent of GDP in 1980 to 7.6 per cent in 1988. By 1989, Peru was experiencing hyperinflation. Tax revenues virtually collapsed. The ‘Fujimori shock plan’ of 1991 helped to stabilise the economy and bring inflation down to manageable levels. In response to the fiscal crisis and the sharp decline in government revenues, the Peruvian government simplified the tax system, particularly for small businesses in the informal sector (Dickovick in press). A simple per´ nico Simplificado (RUS) cent-of-sales formula called the Re´gimen U was introduced. This enabled businesses easily to calculate their tax liabilities. Simultaneously, the state created a central business register of ´ nico de Contribuyentes all participating enterprises called the Registro U (RUC). These steps reduced the costs of formalisation for many small 17
Unfortunately, we have not been able to update the UNACOIS story despite several attempts. Closer examination into how the story unfolded after 1998 would help in refining the hypothesis of this chapter.
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businesses. However, the additional revenues that could be raised by these measures were limited: it is estimated that a 30 per cent increase in the number of taxpayers will raise revenues by only 4 per cent (ibid.). Furthermore, fiscal problems persist at the local level. A high degree of centralisation means that only 4 per cent of state expenditures are routed through local governments (ibid.). Local governments have few resources to fund their mandates. They often employ short-term tactics, taxing or fining small businesses to the extent they can, given political sensitivities and limited administrative capacity. Despite the massive scale of informalisation, historically the local state in Peru has not sought to establish consultative institutions with the informal sector. And local governments have few resources to invest in developing constructive channels for engaging in long-term negotiation. Dickovick (in press) argues that this lack of ‘enduring institutions for dialogue and cooperation’ is also a result of the changing nature of the urban informal sector itself. Liberalisation has weakened and fragmented organisations in the informal sector. Unlike other countries, political parties have not played the role of connecting the informal sector with the state (Cameron 1991). While local associations of informal sector operators abound, the limited capacity and resources of local governments has meant that they have had little incentive to invest in building federations or channels for collective negotiation. Dickovick (in press) examines collective action by informal enterprises in the transport and street-vending sectors in three localities in Lima and in the city of Chicalayo. His research suggests that, when local governments are under pressure to raise revenues, they have tended to employ whatever capacity they have to enforce tax collection in a confrontational way rather than negotiate with the informal sector, and to take unilateral decisions for specific, immediate ends. This tends to fragment business organisations and reduce opportunities for collective action. In Chicalayo, the municipal authority gave preference to larger businesses, which were more likely to pay taxes, and evicted smaller informal sector vendors from the main commercial area (Dickovick in press). In La Victoria in Lima, the local government offered official recognition to certain categories of workers, e.g. shoeshiners, soda and candy vendors and newsagents. The organisations representing these workers subsequently distanced themselves from the other street vendors (Roever 2005). In San Juan, another poor area of Lima, the local government evicted street vendors from the main street, Avenida San Juan, with the aim of increasing tax collections from the remaining formal businesses. However, the government has been unable to prevent a steady reoccupation by the informals. Traders ended up paying less to government than
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before, although they would prefer the ‘implicit contract established by regular daily ‘‘contributions’’ to the irregular fines and extractions of the present day’ (Dickovick in press: 21). They do not object to the principle of paying taxes, but to being obliged to do so without receiving any tangible services. In localities where local governments have not been under urgent pressure to raise revenues, they appear to have been more open to negotiating with the informal sector. In the Centro locality of Lima, the municipality has been able to negotiate with street vendors associations with mutually satisfactory outcomes: an agreement not to tax them in light of the ‘extraordinary economic crisis’ in exchange for their agreement to move from the valuable land they have invaded in the city centre to a less expensive area (ibid. 19). In sum, the comparative case material from different urban localities in Peru hints at a relationship that we are unable to explore in detail for lack of data: in some circumstances at least, where institutional channels for negotiation with the informal sector are weak, urgent fiscal pressures may encourage the state to engage in such arbitrary measures to collect revenue that the possibilities of bargaining are further reduced. 8.6
Comparing the cases
In reviewing these three cases, we can begin to see how the two factors outlined earlier – fiscal pressure and the nature of associationalism – have affected outcomes (Table 8.1). In the case of Peru, local governments faced with revenue pressures have tried to extend direct taxation of the informal sector, with varying degrees of success, depending upon their own capacity and the ability of associations to negotiate their positions. The weakness of institutionalised channels for negotiation between the state and fragmented informal sector collective actors has limited the capacity of urban informal sector associations to influence local tax policy or obtain concessions from the state in return for tax revenues. In Senegal, a strong informal sector union has repeatedly been able to resist state initiatives to tax its members. The relatively low pressure to raise revenues – as measured, for example, by the small size of the fiscal deficit – has contributed to this impasse. In the case of Ghana, a powerful private transportation union enjoying corporatist relations with the government managed to negotiate concessions for itself and for its members, but in the context of conceding the need to pay more tax. The union and the government developed a mutually beneficial system of taxation. We now look more closely at some of the variables and issues that feature in the three cases summarised in Table 8.2.
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Table 8.2 Summary of the three cases: Ghana, Senegal and Peru
Collective action in the informal sector
Context
Taxation potential
Revenue outcome
Ghana
Senegal
Peru
High level of organisation
High level of organisation sparked off by economic reforms National-level organisation
Proliferation of associations, fragmented collective action Not federated
Not connected with political parties
Not connected with political parties
Federation of most organisations All associations connected with political parties Main organisation: GPRTU Fiscal crisis; pressure to raise revenues; tax compliance in the informal sector; old presumptive tax based on standard assessment unsuitable Identifiable group taxation since 1987
Efficient collection of taxes from members; increased revenues generated
Main organisation: UNACOIS Threat of taxation; growth of informal sector vis-a`-vis weakening of other civil society organisations to vocalise and organise demands
Fiscal crisis; fragmented associations and weak channels of interaction between state and civil society organisations (CSOs)
Political force negotiating on behalf of members against indirect taxes; combination of strikes and rallies against extension of VAT Indirect taxes not levied against members
Imposition of taxes on the informal sector, sometimes in a confrontational manner
Mixed outcome: taxes imposed where revenue need was high; no additional revenue in areas where revenue imperative was low, despite improved communication
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Table 8.2 (cont.)
Constraints
8.6.1
Ghana
Senegal
Peru
Less efficient in handing over taxes collected to the IRS; lack of internal democracy; conflicts with other transportation unions as a result of monopoly of lorry parks
Continued exemption of the informal sector from indirect taxation; exchange of rents for political support
Diversity of rival associations based on sectors and localities; fragmentation of associations thereby weakening opportunities for collective action and negotiation
Fiscal pressure
A large informal sector can motivate governments to introduce taxes specifically targeted at the informal sector. Of the eight countries that Bird and Wallace (2003) list which had introduced presumptive taxes for small business, all had informal sectors larger than a third of their GDP. Yet, such taxes can be tokenistic and have little impact on revenues because of the limited capacity of taxation agencies actually to collect them. Serious and successful attempts to tax the informal sector are likely to reflect something close to a fiscal crisis. When the fiscal base of the state is at stake, political support for taxation of the informal sector is often generated. Such crisis can break down the ‘devil’s deal’ – the complicit agreement between politicians and the informal sector not to collect taxes in exchange for support. Our cases seem to bear out this story (see Table 8.3). In all three cases, the informal economy accounted for over a third of the GDP. In Senegal, although the informal sector was large and fiscal pressure was a part of the story, revenues had not fallen that dramatically, and inflation was moderate. In Ghana and Peru, serious government initiatives to extend direct taxation came at a time when revenues had fallen dramatically and inflation was high, particularly in Peru. The case of Peru illustrates that efforts to increase local taxes can have mixed outcomes. In places where the revenue need was high, as in Chicalayo and Lima (La Victoria and San Juan), the state tried to impose taxes rather than negotiate with informal sector unions. Where the revenue imperative was lower, as in Lima (Centro), channels for communication between the state and
43
59
Ghana
Senegal
Peru
1987–91
1982–5
68 (1984) 190 (1990)
25 (1982)
Government debt as % of GDP: highest figure (year) y
7 (1984) 8 (1989)
7 (1981)
Fiscal account deficit as % of GDP: highest figure (year) z
30
10
35
16 (1982) 7,649 (1990)
143 (1983)
Largest single Peak inflation year to year fall in rate during p tax revenues crisis (year) during crisis (%) f
Extent of fiscal crisis
Economic Recovery Programme (1983) IMF support New Industrial Policy (1986) IMF support Fujimori shock plan (1991) IMF support
Name of internationally supported structural adjustment programme
Note that the estimated size of the informal sector is not for the years of crisis as comparable time series data is hard to obtain. Source: Schneider 2002 y Source: World Development Indicators Database z Source: IMF Government Finance Statistics, various years f Source: World Development Indicators Database p December over December CPI % change. Source: Bruno and Easterly database 1999
*
38
Country
1981–5
Size of informal sector 1999/ 2000 as % of Period of GDP * fiscal crisis
Table 8.3 Fiscal crisis: Ghana, Senegal and Peru
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informal sector associations improved, but revenues have not increased. Although fiscal pressure might lead to the imposition of taxes on the informal sector, this may not increase revenues unless problems of collective action and negotiation are resolved. 8.6.2
Associationalism
Informal sector enterprises have already chosen to operate outside state authority and are unlikely to be very sympathetic to the state’s rules, regulations or wishes. In the absence of strong organisational and political enforcement capacity, the attempt to impose direct taxes on the informal sector will not lead to compliance and may be politically costly. In the informal sector in particular, the negotiation of tax initiatives with associations may be important for ensuring sustained compliance. The successful negotiation and collection of taxes through associations is more likely where the sector in question is well organised and dominated by a few strong and broadly representative unions. In Ghana, because passenger transport is structured around lorry parks controlled by unions, it is difficult for transporters to operate at all without being union members. This gives the unions considerable organisational power and reasons to federate. In sectors or regions where there is no equivalent logistical imperative to organise and federate, the informal sector may be unorganised or fragmented. In some countries, political parties are active in organising informal sector unions. However, where political parties are not active in this way, and where there are no other imperatives to federate, a diversity of rival associations based on sectors and localities are more likely to prevail, as the Peruvian case illustrates. The existence of numerous competing unions makes negotiations with the state difficult, whether over taxation or anything else (Davis, Aguilar and Speer 1999). While many of the social and political factors relevant to our concerns vary from country to country, some are more universal. Around the world, the more visible informal sector operations, such as street trading and transportation, are more likely to be organised, possibly because they tend to attract government intervention (ibid.). Other less visible sectors, such as small-scale production, are less likely to be organised. They are also harder to tax. This suggests that visible sectors that are more likely to be organised, are also likely to be more amenable to taxation because they are willing to pay in exchange for some security. They are also more easily monitored. How well does this broad story fit our examples? In the case of local governments in Peru, fragmented associations and weak channels of interaction led municipalities to try to impose unfavourable policies on the informal sector. By contrast, in Ghana, a powerful association closely
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connected to the ruling party was able to negotiate a system of collecting taxes that suited the operators. In the case of Senegal, the threat of taxation was an impetus for organisation, particularly for larger merchants who had the most to lose from the extension of the VAT. The strong association that emerged – UNACOIS – was able to resist further attempts at taxation. 8.6.3
Institutional channels of interaction
The links between associations and governments appear to be central to our three cases. Without such links, credible compacts between the state and associations cannot be established. Political parties can play the role of linking unions and the state, as we saw in the case of Ghana. However, whether links with political parties can help establish stable taxation pacts depends on the political context. Political and associational competition will influence the position of associations vis-a`-vis political parties (Murillo 2000). In countries dominated by multi-party politics with several fragmented unions, close relationships that lead to constructive negotiation around taxation are unlikely to occur. For dominant informal sector unions in multi-party states, a close relationship with the ruling party can be problematic if that party loses the next election. Dominant single parties negotiating with several equally powerful unions can play off one against another without patronising any of them too closely. Where political parties are absent or do not play a constructive role, other channels of interaction are needed. These observations are borne out by our cases. In Senegal, the association representing the informal sector was an independent force, not constrained by prior clientelistic links to the government. It took control of the Chamber of Commerce and gained broad support on a platform of tax exemption for the informal sector. Faced with a strong union, the Senegalese state was forced to back down and agree not to target the informal sector directly for taxation. At least till the late 1990s, the issue was not up for negotiation. There was nothing that the state could credibly offer the union in exchange for its consent to taxation. By contrast, in Ghana the GPRTU was itself dominant in the sector and had a strong corporatist relationship with the state. It could negotiate taxation in a way that favoured both itself and its members. This arrangement could have strengthened the taxation–accountability link between the state and the transport operators. However, limited internal democracy and the union’s stranglehold on the sector prevented members from seeing taxation in such a light. In Peru, despite strong associations among informal sector traders, the lack of institutionalised channels of
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interaction left the local government unable to cater to the demands of a diversity of informal sector voices. 8.6.4
Politics: local or central
Informal sector politics is largely local politics. With the obvious exception of the transport sector, informal sector businesses are predominantly locally based and tend to engage politically with local authorities. Those local authorities are often mainly responsible for the provision of services that are of significance for the informal sector, e.g. policing, regulation and infrastructure. They are more likely than central state agencies to have detailed knowledge of informal activities. By contrast, central governments tend to control the most lucrative sources of tax and usually grant few powers of taxation (apart from fees and licences) to local governments. Tax administrations are often highly centralised. This contrast has several implications for taxation of the informal sector. Central tax authorities are more likely to negotiate policy with federated national-level unions. For example, in Ghana, as we saw, the successful institutionalisation of tax collection in the informal sector was a result of the close connection between the Rawlings PNDC government and the main national association of the transportation sector, the GPRTU. This associational route to taxation was only later extended to a number of other informal sector activities.18 Of course, federated national unions can also strengthen resistance to taxation, as we saw in the case of UNACOIS in Senegal. Additionally, centralised tax agencies are unlikely to welcome associational tax collection if this requires them to work with a number of diverse local associations in the same sector. This is likely to strain their capacity. In Ghana, centralised agreements involving tax collection by informal sector associations were premised on a federated structure of informal sector organisations. However, in many sectors, e.g. hairdressing, there is no reason why local associations should wish to federate nationally. In such cases, associational taxation may not work well.19
18
19
In Pakistan, a senior civil servant reports that the major national transportation unions approach the administration every year (unsuccessfully) to try to establish arrangements for the associational collection of taxes from their members (Omar Masud, personal communication, January 2002). The Ghana National Beauticians Association split in 2000. This created problems for tax administration as only one of the resultant groups was recognised by the Internal Revenue Service. The splinter group, now calling itself the Cosmetology Association, was stopped from collecting income tax from its members by the IRS, and its members were asked to file yearly returns. Filing has been sporadic.
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Yet, centralised tax bureaucracies may have a weak presence at the local level. Local authorities have more detailed knowledge that enables them to identify informal sector operators and assess and collect taxes efficiently. Simultaneously, they are responsible for the provision of local services valued by informal sector operators and may be able to engage in a more or less explicit exchange of taxes for services. Our research in Ghana on informal hairdressers and chop bars showed that informal businesses are more likely to pay local taxes than national ones. Not only is enforcement in such cases stricter, but operators also perceive a link with the provision of visible, useful services such as streetlighting and garbage collection. The link between taxes and spending on nationally provided services such as healthcare and education is less evident. These reflections suggest that where informal sector associations have good reason to unite or federate independently of the arrangements they make with government over associational taxation, then national negotiations over taxation may work well. Conversely, where there are no such imperatives, negotiations may be more effective if they are organised at a more local level. 8.6.5
Taxation–accountability links
The extent to which taxation arrangements can or do enhance accountability and responsiveness between citizens and the state is treated elsewhere in this volume. Our contribution is limited to a specific empirical point: that the use of presumptive income taxes to raise revenue from the urban informal sector appears to provide a promising opportunity to strengthen accountability by making concrete and visible the linkage between taxpaying and reciprocal services. Having opted out of formality, it is unlikely that informal sector operators will be willing to pay direct taxes without corresponding benefits. Compared to indirect taxes, such as sales taxes and, especially, VAT, presumptive income taxes provide many more opportunities for more or less explicit bargaining between the state and representatives of the informal sector. Presumptive taxes can be negotiated around particular informal activities, permitting hairdressing to be treated differently from street trading or small-scale manufacturing. Taxes collected from identifiable sources can be exchanged for relatively specific benefits. In a study in Peru, Roever (2005) found that street traders and informal transport operators did not oppose the collection of funds by the local government but objected to the lack of corresponding services. Street vendors were willing to pay when part of the revenues collected was earmarked for a fund to provide services for the informal sector. In Senegal, the
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opposition of UNACOIS to the VAT was accompanied by offers to consider some kind of income tax based on annual assessments. This was expected to simplify taxation of small firms and exempt microenterprises. In Ghana, GPRTU members were willing to pay presumptive taxes in exchange for freedom from harassment and a collection system tailored to their needs. The attractiveness of presumptive taxation for larger informal sector firms is that the taxes payable are much smaller than if they were assessed individually on actual income.20 Thus, fortuitously, the tax instrument most likely to reach informal activities – presumptive income tax – is also the one preferred by the informal sector. It is also the most likely tax instrument through which links of accountability and responsiveness are likely to be established between the state and taxpayers. 8.7
Conclusions
The urban informal economy is here to stay. We might debate the extent to which processes of globalisation and increased global economic competition have exacerbated informality, but we can no longer expect it to shrink rapidly. The question of how to tax the informal sector effectively needs to be answered if the formal sector is not to bear a disproportionate burden. Yet there is little systematic thinking on the issue. We have tried to stimulate that thinking here, around three main points: First, we suggest that what we term associational taxation might be a good path to take towards the long-term goal of regular taxation of the urban informal sector. While we know of no specific precedents for the type of associational taxation we found in Ghana, there are clear analogues in, for example, the long and contentious introduction of direct income taxation in nineteenth-century Britain. The use of presumptive tax assessments in both cases is not surprising. More striking is the extent to which societal actors were engaged in the processes of assessment, collection and policy advice. As Daunton (2001: Ch. 7) explains in some detail, the processes of assessment and collection in Britain were shared, in ways that varied over time, between non-professional commissioners, assessors and collectors, who were to some degree selected by and from the taxpaying classes. ‘The administration of the income tax depended on a hybrid system of lay and professional administrators which was crucial to achieving consent and minimising resistance’ (ibid. 188). ‘The smooth 20
In Ghana, the IRS abrogated the arrangement with the association of butchers precisely because it was found that large butcheries were attempting to reduce liabilities by becoming part of the association and paying presumptive taxes.
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operation of an increasingly complex tax system came to rely less on the existence of lay assessors and collectors than on the relationship between the Inland Revenue and the taxpayers’ professional advisers’ – notably the Law Society and the Institute of Chartered Accountants. Daunton talks of this relationship in terms of ‘confidence’ and ‘mutual support’ (ibid. 200–1). Certainly, the process of collecting income taxes from the middle and upper classes of nineteenth-century Britain differs in many ways from that of raising revenue from small informal operators in contemporary poor countries. However, the link is the notion that, if the regular revenue agencies find their task very challenging, there are alternatives beyond some kind of private commercial contracting (‘tax farming’) or simply giving up. There are ways of building on – and perhaps in turn helping to build – existing societal networks and organisations. Second, we suggest that presumptive income tax might be an appropriate means to extend revenue raising into the informal sector through associational channels. Presumptive income tax can be collected in ways that best fit with cash-flow patterns in informal enterprises. It is a promising instrument for the kind of revenue bargaining – the exchange of revenue for services and policy influence – that is needed if the urban informal sector is to make a larger financial contribution to government. Third, we propose a framework for thinking politically – and therefore practically – about the circumstances in which different types of associational taxation might be feasible. The central assumption is that sustainable arrangements to tax the informal sector can be reached only through a process of political negotiation between the state and representative associations. The framework, which certainly requires more testing and refinement, focuses on (a) the extent of revenue pressure on the government; (b) the degree and nature of associationalism within the informal sector; and (c) the channels of interaction with state institutions. Finally, the approach to taxing the informal sector suggested here is in keeping with recent thinking about the organisational design of tax administrations (McCarten 2005). The reforms introduced in many countries over the past two decades have generally involved a shift away from organising tax administrations internally by locality and according to type of tax (e.g. sales taxes, property taxes and income taxes), towards organisation by type of taxpayer – e.g. large, middle and small taxpayers (see Chapter 10 of this book). So far, most poorer countries have not gone beyond creating Large Taxpayer Units to deal with a small number of large corporate ‘clients’ (McCarten 2004). However, once one accepts the case for organising by client type, the logic of associational taxation begins to seem almost orthodox. Taxpayers in developing countries tend to be highly heterogeneous. Different categories need different
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treatments. There is a large category – the informal sector – that cannot easily be reached by tax collectors working within the constraints of large, formal and relatively insulated public bureaucracies. Does it not make sense then, to develop taxability on the foundations of the channels through which members of the informal sector currently interact with public authorities?
9
Rethinking institutional capacity and tax regimes: the case of the Sino-Foreign Salt Inspectorate in Republican China Julia C. Strauss
9.1
Introduction
Unenjoyable and equally unavoidable, taxation is at the very heart of politics: we find it at the macro-level concerns of political sociology and state-making, at the micro-level of individual compliance or resistance, and everywhere in between. The making of tax policy is an inherently political process, indeed so political that it could neatly invert the old aphorism: that politics is about who has to pay what, when, where and how. It is the fundamental argument of this chapter that the less ‘political’ and the more ‘bureaucratic’ the implementation of a tax regime is, the more legitimate it is likely to be for all concerned: political elites, taxpayers and tax administrators. The more legitimate state extraction is perceived to be, the more legitimate the state itself is likely to be. Because the word ‘bureaucracy’ is at least as negatively charged in our vernaculars as the word ‘tax’, a few caveats are in order here. By ‘bureaucracy’ I do not mean Kafkaesque systems of unresponsive and unaccountable authority, red tape and catch-22 procedures, although certainly all bureaucratic systems can and upon occasion do produce such outcomes. I mean simply, following Weber, that bureaucracy is an organisational system of hierarchy in which decisions taken at higher levels are incumbent and binding on lower levels; decisions are implemented according to impersonal rules; technocratic and knowledge-based decision-making tends to prevail over personal preference; record-keeping provides institutional memory; formal and fixed salaries make informal fee-taking unnecessary and deemed corrupt; incumbents are clearly separable from the offices they hold. Bureaucratisation of course has downsides: following Scott, state action in effect simplifies often complex wider policy environments in 212
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order to make them amenable to impersonally applied rules.1 Those on the receiving end of ‘bureaucracy’ may well be alienated, and those who sit atop it in nominally superior positions may well possess the technical knowledge to make appropriate decisions. But bureaucracy has a number of real advantages over other forms of organisation. The ways in which it depersonalises authority make it easier for the organisation to survive generational and leadership change. The manner in which it simplifies by standardised rule-making makes it relatively straightforward to administer so long as its policy sphere is amenable to standardisation and rulemaking. Treating external clients according to the same set of rules is ultimately seen as being fairer than any other way that could be imagined. Indeed, one of the key problems in many developing countries is not that they are overly bureaucratic, but that their state organisations are not bureaucratic enough in terms of uniform application of impersonal rules. The external face of the air-conditioned bureaucratic office (the form of bureaucracy and all its monocratic authority and domination) is in many places undercut by the informal reality of the veranda, where clientilism, personal favours and highly variably treatment are the norm (Migdal 1988; Terray 1986). To extend the metaphor, the formally bound enclosed space of the office exists in all developing countries, but the air conditioning does not work and may never have worked. The informality and occasional breezes of the veranda are usually the only practicable means of getting anything accomplished. But access to the veranda is unequal. Decisions made there are often a function of the standing of the supplicant, or, worse yet, the mood and caprice of the decision-maker. In the long run, they may be seen to be unfair by those who either did not get access or felt themselves to receive less in the way of benefit and favours. Impersonal and impartially applied rules, for all their homogenising tendencies in treating complex individuals as standard categories, are typically seen as being fairer and in the long run add to the legitimacy of the state. Relative to other arenas of state policy, such as education, environmental conservation, or any kind of health issue that requires change in behaviour, tax regimes are unusually amenable to bureaucratisation and depersonalised rules, once they have been decided on. This is because of the inherent characteristics of the tax ‘task environment’ and organisational
1
The classic articulation of these Weberian precepts can be found in Gerth and Mills (1946: 196–204, 209–16); James Scott’s more critical take on the social, ecological and human costs of bureaucratic simplification are elaborated at length in Seeing Like a State (1998).
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technologies.2 Unlike education (where long-term outcomes are often resistant to measurement) and lifestyle health issues (which require significant change in individual behaviour such as giving up smoking), tax administration deals with unit outcomes that are in principle objectively knowable, measurable, quantifiable and divisible. In these circumstances, it is an inherently more straightforward process to come to agreement about both goal and method of achievement. Standardisation of the unit of achievement removes many of the sources of political wrangling and reduces the scope for groups to talk past one other. When these basic units are unquantifiable, organically whole, or deeply contested in terms of their value, agreement is much harder to reach. It is, at least in theory, relatively easy to devise a tax system that is at least standardised if not so agreeable to all on grounds of fairness. There is always a bottom line (revenue receipts) that provides quick confirmation of an organisation’s efficiency (e.g. ratio of receipts to administrative costs) and effectiveness (meeting targets), or lack thereof. There is minimal need for clients to change their social behaviour, other than to internalise the norm that individuals and enterprises must comply with the state’s tax assessments and pay. It is in some ways extraordinary that, in the places where this works well, individuals have largely internalised this norm. In advanced industrial polities we are not used to thinking in terms of the state as organised violence and coercion. Yet, year after year we sigh and more or less voluntarily part with anywhere between one-third and one-half of our income. In contrast to policing, security and the military – all more overtly coercive elements of the state – the implicitly coercive nature of the state emerges as regular, routine and ongoing for all of us in taxation. Bureaucratisation in a wider social sense – a set of expected routines that come around on an annual cycle – seems conducive to widespread internalisation in terms of client compliance and behaviour. Despite the advantages in organisational technologies and task environment that make tax at least relatively amenable to bureaucratisation and depersonalisation, the actual implementation of tax regimes in the developing world is anything but a cakewalk. In many places, funding for tax assessment and collection is totally inadequate, tax evasion is rife and opportunities for corruption and malfeasance in office are abundant. Indeed in many environments the tax collector is among the most feared and hated of all state agents, not only for the coerciveness inherent to tax 2
The concept of the ‘task environment’ as critical to organisational functioning is taken from Thompson (1967), and the ‘bureaucratic’ form of decision-making (where goals and means of achievement of those goals are both agreed on) is deemed ‘programmed’ decision-making.
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exaction, but for the often arbitrary and ad hoc way in which the exactions are levied (see Chapters 4 and 5 in this volume). To take one example: with remarkable consistency for a state that has undergone such dramatic regime changes over the last hundred years, in China the basic land tax has normally been kept deliberately low for a mix of ideological and practical reasons. Practically, the basic land tax has proved to be very difficult to administer. Moreover, historically most notions of moral statecraft in China have included the provision that virtuous government kept taxes light and offered remission in times of agricultural distress or natural disaster. This was true in the late imperial period, was continued by the successor regimes of the Republic (1911–49), was enshrined as policy in the revolutionary People’s Republic (1949–78) and has just been taken to its logical conclusion in the present, with the central government’s recent announcement that it intends to phase out the land tax entirely in the next few years. As such, the basic land tax caused little occasion for worry on the part of political elites or protest on the part of the payers. But the basic land tax (kept low) has historically hardly sufficed as a basis for the modernisation and expansion of the Chinese state. Instead it has consistently been locally levied tankuan and zashui – numerous miscellaneous fees exacted by local authorities to fill funding gaps – that have served as flash points for protest and kept central policy-makers up at night (Bernstein and Lu¨ 2003).3 With remarkable and depressing consistency, the proliferation of irregular and ill-supervised levies by local state agents have been the triggers for protest from below as well as a developed discourse of lament from above on how to cut through the thicket of special privilege, ad hoc funding arrangements, weak supervisory and auditing functions, and erratic predation. This has been true of the late imperial, Republican and contemporary reform periods.4 To take just one example, at the end of the 1990s, a survey done in the province of Guangxi indicated that, in practice, cashstrapped counties levied anything between seven and nineteen different kinds of fees on forestry products that ended up exacting between 30 and 50 per cent of actual product value. The author noted darkly that these sorts of results both damaged local economic development and were 3 4
For the best description of the dynamics of escalation in off-budget revenues see C. Wong (1997, 1998). For one excellent example of work that actively compares variation in local state responses in terms of tax in both Republican and reform era China, see Remick (2004). Remick’s point is not to suggest that there is an historical line of institutional continuity between the Republican and reform era Chinese states; rather that the structural similarities in underfunding and chronic auditing/supervisory capacity from above have created similar outcomes.
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highly unfair in practice, as it was those least able to pay that were hit with the largest number of surcharges (Li Mingfeng 1999: 58–9, 62). While Li Mingfeng avoids using the words ‘tax protest’, with its connotations of rightful resistance, its covering code (‘endangering social stability’) clearly indicates the phenomenon and its latent danger for government legitimacy in rural China. Tax, along with internal and external security as well as diplomacy, is at the heart of the state. But tax is unusual because it is simultaneously a key enabler of other aspects of state-building – without the funds coming in, there is not much a state can proactively accomplish by way of programmes – and a reflective indicator (a crude measure) of the state’s institutional capacity. Strong and proactive states for the most part also have strong and proactive capacity to raise financial resources, through some combination of taxes, non-tax revenues from public enterprises (as was the case in nineteenth-century Prussia), and financial institutions that enable the state to use secure tax and non-tax revenues to borrow significantly and cheaply from its own citizens (as was the case in the Netherlands from the seventeenth century and Britain from the eighteenth). But many contemporary developing countries are effective neither as tax nor as fiscal states. Japan, South Korea, Singapore, Taiwan and perhaps Malaysia are possible exceptions. More common are the Cameroons, the Egypts, the Nigerias and the Uzbekistans, where bureaucratic autonomy and the ability to tax impartially are limited. These countries face a basic institution-building dilemma: how to expand the capacity of state institutions when the existing fiscal and administrative bases for so doing are inadequate. Obviously, there is a certain imperative to first turning attention to strengthening tax institutions. Yet here too a negative feedback loop often prevails: weak infrastructural and tax-generating capacity of state institutions results in shaky revenue streams available to higher levels to plough back into state-building and key social programmes. In chickenand-egg fashion, weak tax regimes then provide prime environments in which ad hoc, ill-supervised, predatory local state agents, buy-offs of local elites and de facto tax farming all flourish. Such outcomes may be perceived locally as basically legitimate, fundamentally illegitimate or some combination of the two. But, irrespective of how these taxes are locally perceived, these modes of revenue raising make it very difficult for the tax regime (and eventually the state itself) to become more rulebound, more impersonal and more regularised. In sum: developing countries on the whole need a relatively effective tax regime to enable further construction of state institutions and legitimacy. A relatively depersonalised and bureaucratic system is the best way of dealing with these issues in relation to taxation. Yet, in most developing countries institutional
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weakness and lack of bureaucracy in the tax regime both denotes and perpetuates further weakness in the regularisation and bureaucratisation of both tax and the state as a whole. There are, however, some tax organisations that that have managed to make significant inroads into this institution-building dilemma. The Sino-Foreign Salt Inspectorate, which operated in China between 1913 and, with various name changes, the end of the Republican period in 1949, was one such organisation. The strategies by which it cut through the unenviably complex and custom-riven salt tax regime of early Republican China suggests important lessons that can still be learned nearly a century later. The Sino-Foreign Salt Inspectorate self-consciously adopted a set of strategies of rigorous bureaucratic organisational insulation against a hostile environment, and equally bureaucratic and procedural approaches to goal achievement. Its high performance and good results in turn enabled the organisation to quite literally ‘buy’ its continued existence and de facto autonomy despite the highly stressed environment in which it operated: marauding warlords, takeover by a new nationalist government and ultimate incorporation into the new government’s Ministry of Finance. Section 9.2 provides an historical account of the Sino-Foreign Salt Inspectorate. In Section 9.3 I examine the factors which contributed to the development of a professional salt tax administration. Section 9.4 addresses the question of how the salt tax administration survived in a very hostile political environment. Section 9.5 concludes. 9.2
Institution-building dilemmas: the case of the Sino-Foreign Salt Inspectorate, 1913–1937
Historically, the fiscal base of the Chinese state was the land tax, but, for several reasons, this was inadequate to meet the demands of a modern military, educational system, transport system, industry and the punitive damages foisted upon the state by foreign powers in the aftermath of the Boxer Uprising of 1900. First, an unchallenged ideal of statecraft dictated that the land tax be kept low to demonstrate the emperor’s magnanimity and virtue. Second, the practical difficulties of conducting an accurate cadastral survey meant that there were no accurate records on landholding.5 Third, the de facto partnership of the imperial bureaucracy with the literati meant that in practice local elites were able to keep their own land holdings largely off the tax rolls. From the middle of the nineteenth 5
The most recent cadastral survey had been conducted in the mid sixteenth century under the Ming dynasty.
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century on, a series of ad hoc taxes, primarily the lijin tax on internal transit of goods, were levied in order to raise the funds to put down the Taiping Rebellion (1851–64). In the aftermath of the rebellion, these taxes were extended by powerful regional viceroys who petitioned the central government to be allowed to raise funds for modernisation projects. The result was the expansion of an informal sub-bureaucracy in the provinces that, while not illegitimate, was never a part of the formal structure of the regular Chinese state and was largely beyond the purview of the central state’s auditing and supervisory authority. Nor was it staffed by the generalist administrators of the regular bureaucracy, with its binding rule of avoidance forbidding individuals from serving in their home provinces (Morrisson 1959). The growth of treaty ports, the beginnings of international commerce and industrial development, created a small, but dynamic and growing economic sector that was often highly concentrated, and in theory taxable. As is the case in many developing countries, it was in urban treaty ports and in the new, expanding commercial and industrial economy that the tax efforts of all Republican-era governments were concentrated. A succession of weak Republican regimes, from the fall of the dynasty through the Nationalists, had neither a reliable central state apparatus to collect taxes in the provinces, nor for the most part the desire to stir things up in the countryside by conducting accurate cadastral surveys and enforcing a fairer and more uniform taxation regime (Rawski 1989). China’s salt tax regime in the early twentieth century, however, presented a quite different ‘tax environment’ from commercial, excise or stamp taxes. Salt taxes had been collected in some form for hundreds of years. Unlike the relatively more easily taxable ‘modern’ sector of commerce, salt production was dispersed and found in some of the more farflung and inhospitable parts of the hinterland. The actual administration of the late imperial salt tax regime was, like most of the taxes levied by the imperial state, riven with exceptions, exemptions and customary privileges. Different forms of collection were in place, ranging from lucrative concessions on transport and retailing granted by the state to salt merchants, to a one-off tax at the site of salt production. Every salt works was subject to a different regime and different customary practices. Multiple taxes on the official weighing, transport and sale of salt were common. This resulted in wildly variable and mostly regressive rates. Poor areas in the interior often paid the most and wealthy commercial areas on the coast the least. The salt tax was also notoriously ‘leaky’. Its numerous surcharges were at best applied inconsistently and in most areas policed by paramilitary bands of ‘salt police’, on irregular and inadequate salaries, whose major source of funds was pay-offs to turn a blind eye to the
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very salt smuggling that they were supposed to prevent (Adshead 1970: 20–38). Salt administration reformers astutely diagnosed these problems as early as the turn of the twentieth century. But beyond the establishment of cosmetic and ineffective regulatory central Salt Tax Office (Yanwu Shu) in 1912, the institutional capacity to push through any of the obvious reforms was nil. The Republican central government was weak, with little meaningful power in the countryside. In the warlord period of 1916–28, it presided helplessly over the political fragmentation of the country. One could scarcely imagine a taxation regime more problematic and less amenable to building strong institutions. Although some of the justifying language was different, much of the impetus to set up a reformed salt tax regime was similar to that surrounding International Monetary Fund (IMF) structural adjustment programmes and aid-funded institution-building programmes today. Moreover, the organisational results were similar: an institution very similar to what in developing countries today are termed semi-autonomous revenue authorities (ARAs) (see Chapter 10).6 In 1913, the then strongman of the Republic of China, Yuan Shikai, wished to contract a large loan from foreign financiers to consolidate the late imperial debt to prevent an imminent default. While he was at it, he aimed to raise a substantial advance for his central government to build the army and put down a secessionist movement in the south. The upshot of negotiations was a controversial package known as the Reorganisation Loan, in which much of the debt inherited from the recently departed imperial government was consolidated by a consortium of foreign banks (known to the Inspectorate as ‘The Group Banks’). The then large sum of £25 million was made available to Yuan Shikai. The Group Banks required securities on the loan. China’s Maritime Customs Administration, conventionally the main source of hard currency for the central government, had already been mortgaged out. The Group Banks turned to the salt tax, demanding the establishment of a new organisation known as the SinoForeign Salt Inspectorate to physically collect the tax and manage the transfer of funds to the government’s foreign creditors. The organisation of the Sino-Foreign Salt Inspectorate now appears colonial and bizarre. A Briton, Sir Richard Dane, was brought in to set up the Salt Inspectorate. He spoke not a word of Chinese. His career had been made in the Indian Civil Service, where he had last served as the head of excise and salt. The Inspectorate itself had a set of far-flung district offices staffed at the top by joint Chinese and foreign district 6
On ARAs and their benefits see Talierco (2004); for a more balanced view on these sorts of revenue-collecting organisations, Moore and Schneider (2004: esp. 22–6).
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inspectors with co-equal authority. This odd organisational set-up, with its preponderance of foreigners in positions of real administrative decision-making, rather than simple advising, was of course against the contemporary trend of rising nationalism and anti-imperialism. But in the early twentieth century there were ample precedents for such an arrangement. The Maritime Customs Inspectorate General, which later became the customs administration under the Nationalists, on which the Salt Inspectorate was directly modelled, had maintained such a system of district offices and joint foreign and Chinese management since the middle of the nineteenth century. Maritime Customs in turn was modelled on the Indian Civil Service of the earlier nineteenth century. There was a similar organisational structure in the Chinese postal service established by France, as well as direct analogues in salt administration for the two other big uncolonised states of the time, Turkey and Persia. The Sino-Foreign Salt Inspectorate was the very last of these joint-authority civil service systems to be established. The Inspectorate was a political anachronism almost from the moment that it came into existence. Controversy and significant opposition from nationalists of all stripes and from Yuan Shikai’s political opponents surrounded its initial establishment in 1913. By the early 1920s it was an increasingly politically vulnerable target for rising nationalism. When the revolutionary Guomindang (Nationalist) Party rose to power in 1927–8, one of the first things that it did was to abolish the Sino-Foreign Salt Inspectorate, along with the Maritime Customs Administration and the independent Post Office. Yet, despite these very real political liabilities in being de facto independent of the Chinese government, with a heavy and visible foreign presence that reeked of imperial privilege, the Inspectorate more than survived. It managed to establish itself successfully in a very challenging environment, which was characterised by both political hostility and responsibility for collecting a very difficult tax. It became one of the very few functioning agencies still remitting funds from the provinces to the central government during the most disruptive of the warlord years of the 1910s and 1920s. It negotiated its way through incessant civil war from its establishment through to the mid 1920s. It coped with the rise to power of an aggressively and hostile nationalist new government in 1927–8. It was dissolved in 1928, then was revived and reincorporated into the new government under the nominal jurisdiction of the new Nationalist Ministry of Finance. It then became the second pillar of Nationalist finance, and also served as a model for new tax regimes in other divisions set up by reformers and rationalisers in the Nationalist Ministry of Finance in the 1930s. Ultimately, the Inspectorate only declined during the years of the Sino-Japanese War, which was a period
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of almost universal de-institutionalisation within the Nationalist government. It was during this time that the staff of all government organisations increased by a factor of at least four when all were overwhelmed by rapidly recruited, patchily educated and insufficiently socialised young personnel. The unexpected organisational success of the Sino-Foreign Salt Inspectorate demands explanation, particularly given the circumstances in which it arose: a political anachronism almost from its inception, consistently attracting hostility from nationalists both inside and outside the government, and operating in a wider policy environment in which the vast majority of government organisations, especially in tax collection, were ineffective, inefficient, rent seeking and corrupt. What were the secrets of this unanticipated and extraordinary success, and what, if anything, can be learned from this nearly a century on? The two most important ‘lessons’ gained from this experience were diagnosed at the time as the need to establish and preserve the organisation’s own internal integrity, chiefly through ‘strategies of insulation’; the value of simultaneously launching externally oriented ‘strategies of goal achievement’. Without insulation and buffering from an extremely hostile surrounding environment, with pressures for accommodation with vested interests and webs of familial and ascriptive ties, the Salt Inspectorate would have failed before it even started – as was the case with the ineffective central Salt Tax Administration established at the beginning of the Republican period. Given the complexity and hostility of most of the Salt Inspectorate’s environment, internally oriented strategies of insulation could not be pursued without cost. They had literally to be bought. Once the organisation could demonstrate, in an objective and unquestionable way, its success in fulfilling its mission of both efficiently and effectively collecting the salt tax, it was much more likely to garner acceptance or support from sponsors and potential predators – initially the Group Banks, later aspiring warlords, and finally the Nationalist government itself. Net tax receipts earned by the Inspectorate are shown in Tables 9.1 and 9.2. Table 9.1 covers the period from 1913 to 1927, when the Inspectorate directly deposited loan-servicing funds to the Group Banks consortium and then forwarded the surplus to whatever government was nominally in power in Beijing. Table 9.2 covers the years of the ‘Nanjing Decade’, when the Guomindang Nationalist government was making its greatest efforts to reintegrate the central state, before the experiment was abruptly halted by the outbreak of the Sino-Japanese War in mid-1937. Both tables indicate how successful the Salt Inspectorate was in revenue collection, and
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Table 9.1 Net tax receipts of the Salt Inspectorate, 1913–1927
Year
Net tax receipts (million standard silver dollars)
1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927
12 60 69 72 71 81 81 79 78 86 80 71 74 64 58
Source: P. T. Chen 1935–6: 1,298
Table 9.2 illustrates the importance of the salt tax to the Nationalist government’s revenues.7 When the Inspectorate was set up in 1913, no one envisioned how successful it was going to be. From the first full year of operation in 1914, tax receipts climbed steadily until 1922. They then began to fluctuate and decline as civil war intensified and warlords captured district offices and their takings. Once the National Revolutionary Army began to win victories on the Northern Expedition to reunify the country in 1926, it tended to simply shut down any Inspectorate offices in its path. Table 9.2 illustrates how successful, measured by revenues collected, the Inspectorate continued to be when, after its initial abolition, it was 7
Unfortunately, there is no reliable information on percentage of the salt tax for total central government receipts in the 1913–27 period. This was a time of enormous contestation between the central government in Beijing and the provinces over the basic mechanics of state organisation and tax; most provinces simply ceased remitting taxes to the central government in 1911, with the fall of the dynasty. Apart from a brief period in 1914, there was little that the central government could do to get those funds flowing again. After the death of Yuan Shikai in 1916, the state gradually fragmented during the warlord period. Apart from Maritime Customs and the salt tax collected by virtually independent organisations with heavy foreign adviser presences, there seems to have been little to no money flowing to the central government at all.
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Table 9.2 Salt Inspectorate collections under the National Government, 1928–1937
Year
Million piculs * of salt on which tax was collected
Amount of tax collected (million standard silver dollars)
Tax collected as % of central government receipts
1928 1929 1930 1931 1932 1933 1934 1935 1936 1937
53 61 42 44 48 47 45 53 49 43
54 61 42 44 48 47 45 53 49 43
n/a 12 27 28 23 27 27 26 30 26
*
A picul was a standard measure of weight used for grain, opium and salt, amounting to roughly 52 kilos Source: Changqing Ding et al. 1990: 218–19
reconstituted under the Nationalist Ministry of Finance. Tax receipts continued to climb during the Nanjing Decade, despite a diminished taxable base: key salt works were lost when Japan invaded the three north-eastern provinces of Manchuria and set up as the new state of Manchukuo in 1931–2. Pressure from the central government to raise tax rates accounted for some of these gains, but so did administrative consolidation, the evening out of tariffs and administrative leanness. Contemporary observers agreed that, relative to the administrative costs of other contemporary state organisations, the Inspectorate’s administrative costs were never high. Even so, in the early 1930s, when under pressure from the Nationalist government, an extra 6 per cent of what would now be called efficiency gains was further wrung out of administrative costs (Strauss 1998: 90). 9.3
Institutional set-up and insulation of the Salt Inspectorate
‘Strategies of internal insulation’ linked to ‘strategies of external goal achievement’ sound well and good. In practice neither was automatically forthcoming; both were hard earned, and each was mutually
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dependent and reinforcing. Without well-insulated and professional staff, the Inspectorate would be unable to produce the revenues and clearly demonstrate efficiency and effectiveness to the constituencies to which it was answerable, i.e. the Group Banks in the early Republic, and the Nationalist government in the Nanjing Decade (1927–37). It is well understood in the literature on ARAs that insufficient insulation of staff or organisational autonomy is a recipe for inefficiency, corruption and ineffectiveness. What is often less appreciated is that external and measurable goal achievement is as important a part of this kind of institutionbuilding as is insulation. De facto separate administrations, particularly those with a heavy foreign presence and higher pay scales than the norm, attract attention and resentment from elsewhere in the bureaucracy. They are almost by definition obnoxious to nationalists and raise serious questions about political accountability and loyalty. Without being able to demonstrate effectiveness (ever larger amounts of tax revenue coming in), efficiency (through cutting administrative costs), and relative efficiency and effectiveness compared to other tax organisations operating in the same arena, either concurrently or in the very recent past, an organisation like the Inspectorate (in the early twentieth century) or an autonomous revenue authority now is going to be politically vulnerable. This brings us back to the question of mechanics: given the tight linkage between the necessities of simultaneously insulating the organisation and demonstrating its effectiveness in goal achievement, what were the Inspectorate’s strategies of insulation and goal achievement, and how were they pursued in the exceptionally difficult policy space of Republican China? The simple answer is through a coherent logic of bureaucratisation that applied equally to both strategies of internal insulation and external goal achievement: depersonalisation of administration, simplification and standardisation of procedures for tax collection and, wherever possible, rationalisation of tax rates through a free market and administratively straightforward policy of single-point taxation called ‘taxation at the yard and free trade thereafter’ (jiuchang zhengshui). This coherence of organisational mission, structure and programme was made possible in the first instance because of the exceptional vision and administrative leadership of the founding Chief Inspector for the Salt Inspectorate, Sir Richard Dane, who had already held a similar position of Chief of Excise and Salt in the Indian Civil Service. He understood well not only how to go about constructing a viable and non-corrupt salt tax administration, but also how to play bureaucratic hardball. When the Inspectorate was first formed and Dane called in, details such as control over the funds until point of release to the Group Banks had not been worked out. No one
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seems to have considered the fact that the Inspectorate would be such an effective tax gatherer that there would be a surplus beyond the annual repayment needs of the Reorganisation Loan. Dane astutely wrested these functions for the Inspectorate, after which the central office of the Inspectorate had control over the tax funds until disbursement to the Group Banks. In 1914 the Inspectorate established the principle that any surplus on the salt tax collection would be forwarded to whatever Chinese central government existed at the time. The bureaucratic entrepreneurialism of this early stage was crucial, as it gave the organisation the means by which to insulate itself and provide high staff remuneration and benefits. It was also Dane who laid the foundation of the Inspectorate’s ethos in a list that later became known as the ‘Fourteen Principles’. This included the total separation and insulation of the organisation around a norm of civil service; the replacement of a host of customary arrangements, assorted government and salt merchant monopolies on salt production, sale and transport with one centralised organisation with one standard (and hopefully lower) tax collected at the salt works; and at all times presenting itself to the outside as an efficient, effective piece of administrative machinery that could get the job done. This was important because, at the time of its creation, the Inspectorate had a potential bureaucratic rival in the Yanwu Shu (Salt Office). This was established as part of the then weak central government’s effort to set up a supervisory and administrative organisation to oversee all salt taxes in 1913. Had the Yanwu Shu had the projective capacity, the access to the funds, or the vision of bureaucracy that the Inspectorate had, it could have become a major rival for policy space. However, the Yanwu Shu from the outset was riven with patronage and ineffectiveness; indeed its only serious claim to precedence was on the nationalist grounds that it had no foreign advisers (Strauss 1998: 75–8). The force of Dane’s personality and policy preferences loomed very large in the first critical years after the Inspectorate’s establishment. It would be a mistake to discount his lasting influence, but it is equally important to note that after this early stage, strong leadership at the top was not a factor at all in the Inspectorate’s success. Dane was only in the Inspectorate for its first four years and was succeeded by a series of faceless and unimpressive chief directors. It was Dane’s particular gift to insist on a clearly defined and minimalist programme for both internal insulation and external goal orientation that, once elaborated, would outlast him and any number of less competent leaders. The core of the organisation’s mission and ideology was its complete insistence on Weberian depersonalisation and rationalisation. This was the fundamental overarching principle for the Inspectorate well into the Sino-Japanese War (1937–45).
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In this sense, bureaucratisation was never a source of dryness or alienation for those who worked for it. On the contrary, it was a highly motivating and positively charged set of norms that was actively aspired to. The evidence suggests that individual staff members did strongly identify with the Inspectorate, gave it years of service under extremely trying conditions and recited its praises for years thereafter. The reasons for this extraordinary loyalty were what Dane and others consistently referred to as the Inspectorate’s ‘strong civil service traditions’. Those who worked for the Inspectorate, wrote its policy papers and reviewed its recent history all agree on this point. For the Inspectorate, the core of its institutional integrity, and linchpin of insulation and goal achievement, was in the creation and then preservation of its own independent civil service system. This system included its own rankings, grades, entry and promotion criteria, all buttressed by a salary scale and generous benefits that were far in excess of anything else (save the Maritime Customs Administration) on offer in the Chinese government service of the time. First establishing, then maintaining, the impartiality and incorruptibility of Inspectorate personnel was at the very heart of all Salt Inspectorate policy. High salaries and an independent civil service system characterised the Inspectorate from the outset in 1913 until well into the 1930s. Thereafter, under the new political masters of the Ministry of Finance, foreign district inspectors were nearly hysterical with worry over the ‘dilution’ of the Inspectorate’s ‘strong civil service traditions’ in general and the decline of their own positions in particular (see Report by J. D. Croome 1939, hereafter cited as ‘Croome Report’). Even fifty years later, informants in Taiwan waxed nostalgic over what a good thing the Inspectorate civil service and personnel system was, how well it worked in comparison to anything else at the time, and how enlightened it was in view of what came later.8 The Inspectorate’s independent civil service system offered an entire career and way of life in prefectural district administration. The way it was set up reified its separation from the regular government, while encouraging stability and low turnover by rewarding seniority. The salary scales, particularly at the middle ranks, were perceived to be extremely high in comparison to regular government salaries. In fact, a cursory glance at the salary scales suggests that the differences between the Inspectorate and the regular Nationalist government were not that great; both started and ended their pay scales in comparable places. But 8
Interviews with Chen Guisheng (Taipei, 16 January 1989), Lin Jiyong (Tainan, 24 January 1989), Zhong Liangzhe (Taipei, 20 January 1989) and Zhou Weiliang (Tainan, 23 January 1989).
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these start and end points mask significant differences in how the individual advanced through the ranks. In contrast to the regular civil service system in the Nationalist government, the Inspectorate’s personnel system had a relatively short spine, with only three to four points within six different grades. Regular, if slow, promotions between different grades were expected, and granted as vacancies opened in different parts of the prefectural administration. This was quite unlike the regular government bureaucracy, which had only three different classification grades, each with many points; and huge bottlenecks on promotion between ‘delegated’ and ‘recommended’ status, as well as slightly less severe ones between ‘recommended’ and ‘selected’ grades, as a system of strict quotas for advancement between grades was set at a flat 10 per cent (see Table 9.3). In comparison to their counterparts in the regular government, Inspectorate staff could look forward to regular salary increases and at least semi-regular promotions if they remained in service. There was only one way into the Inspectorate for Chinese staff, and that was at or near the bottom, through a general civil service examination.9 After the entrance examination, successful examinees were offered a three-month training course in salt administration, followed by another placement examination, and then a post at one of the lowest three points on the scale as vacancies became available. There were also in-house examinations to progress through the lowest three points. After that, the promotion rate slowed considerably, as promotion was a function of particular posts coming open, but in contrast to the regular government bureaucracy, there were no fixed quotas for promotion. Skipping steps within grades was simply forbidden. Since a basic uniformity of competence was assumed to be the case from a process of annual review, seniority tended to be the critical variable determining promotion. The relatively small number of foreigners in supervisory positions were of course initially recruited for high levels in the organisation, but even they were expected to put in years of service and rise slowly. They, like the Chinese who made up the bulk of the personnel, tended to stay with the Inspectorate for the remainder of their careers. This engineering of stability and continuity had a downside: it was undoubtedly frustrating for the most capable and ambitious to have to wait for so long for promotion to the top ranks. It was recognised even at the time that the Inspectorate lacked ‘a forward looking spirit’ (Strauss 1998: 70–2).
9
Foreigners, in contrast, were recruited by open advertisement at the sub-assistant district inspector stage.
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Table 9.3 Comparative personnel classification and salary scales Nationalist government Grade
Salt Inspectorate Rank
Teren (‘special’ appointment)
Jianren (‘recommended’ appointment)
Jianren (‘delegated’ appointment)
Monthly salary (yuan) 800
1
680
2 3 4 5 6 7 8 1
600 560 520 490 460 430 200
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
180 160 140 130 120 110 100 90 85 80 75 70 65 60 50
Grade
Rank
A
a
Monthly salary (yuan) 800
b c d
750 700 650
e
600
B
a b c d
550 500 450 400
C
a
350
b c
300 250
D
a b c
220 200 175
E
a b c
160 140 120
F
a b c d e f
100 85 70 60 50 40
Source: Adapted from Kwei Chungshu 1936 and Yanwu Renshi Guize [Regulations on Salt Administration Personnel]. Unpublished booklet. Taiwan: Caizheng Bu [c. 1950]
However, entry by civil service examination and then slow but steady advance through the ranks was augmented by a system of benefits that was far in excess of anything else on offer at the time. These included a sabbatical year of ‘long leave’ for every seven years of service, home leave,
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generous sick leave and pensions.10 The Inspectorate, like many prefectural organisations, worked on a principle of frequent rotation. Middleand higher-level staff were not permitted to remain in the same district office for more than five years. Even clerical and support staff were rotated fairly frequently between different local offices within the same district. Positive incentives were also matched with unrelenting discipline. The Inspectorate’s core strategies of internal organisational insulation were intended to provide an environment in which officials could reasonably be expected to work hard, implement regulations and refrain from corruption. This meant that even a hint of corruption, being subject to undue influence, or favouritism in the performance of duties resulted in immediate sanctions, such as administrative warnings and demerits for mistakes. Evident corruption led to immediate dismissal, even for those who had reached high rank.11 Frustrating as such a conservative, senioritybased organisation might have been for the most fiery and ambitious, enough clearly committed and capable people remained for the long run, including years of civil war and foreign invasion. Although the Inspectorate’s insistence on a ‘strong civil service’ was derived from the model of the Indian Civil Service and grounded on recognised principles of fairness and efficiency, it was implemented in a social environment in which there was already strong predisposition to these ideals. The trope of the ‘career open to talent’, the notion of fair job access guaranteed by open civil service examination and the ideal of the honest and upright official were all solidly legitimating norms that had been components of Chinese political culture and statecraft for the previous two millennia. Indeed they were so deeply legitimating that they had served to bind (elite) society to the imperial state for hundreds of years (see Elman 1991, 2000). In the institutionally and politically fractured environment of early twentieth-century China, these norms had lost none of their relevance. What was lacking for most state organisations was the substantive means by which to make them a reality. The Inspectorate’s particular emphasis on neutral civil service systems was 10 11
Fifty years later, my informants in Taiwan reflected on how wonderful that sabbatical year was, and how they wished that this benefit had been retained after 1949. In the sample of 185 for which I had full access to personnel records between 1914 and the mid 1930s, there were fourteen cases of dismissal. Most of these were low-level staff engaged in corruption at the stage of ‘weighment’, when bags of salt were weighed and the tax assessed. But one of the dismissed had reached the rank of Assistant District Inspector, ten had worked for the organisation for ten years or more, and one had even garnered a previous commendation for distinguished service. This was an organisation that took its own principles and regulations extremely seriously, even when applying them to its own. See Strauss (1998: 72–3 and n. 30) for further details.
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based on a universalist set of principles. But it surely did not hurt to have a set of norms at the organisation’s core that resonated so powerfully in the society from which staff were drawn as well as among the political elites with whom accommodation would have to be reached after 1927. The organisation’s near fetishisation of its own uniquely righteous neutral civil service principles overlapped substantially with a wider set of political and cultural norms that similarly reified civil service as both a reflection and an implementer of good governance. Given the depth of nationalist hostility to the very existence of the Inspectorate, the rhetoric and reality surrounding its core of depersonalised civil service were among the factors that ensured its survival and influence in the post-1927 world. The other pillar of the success of the Salt Inspectorate was that it ‘delivered the goods’. It more than satisfied the Group Banks and provided a succession of weak, nominally national Chinese governments with an annual injection of otherwise unexpected funds. It even survived and prospered when put on a much shorter leash under the Nationalist government in the 1930s. Part of the reason for this success lies in the remarkably serviceable, but minimalist set of tasks and orientations built into the Inspectorate’s core in the Dane years through the elaboration of the ‘Fourteen Principles’. Part lies in the fortunate fit between the organisation’s sheer, dogged insistence on depersonalised bureaucracy in all things and the way in which the divisible, objectively knowable and measurable components of the salt tax lent themselves to bureaucratic strategies of rationalisation. Tax on a commodity such as salt is, by definition, amenable to standardised units of measure; in this case, weight and money. Accounting is relatively straightforward. Results in the form of revenues collected in a given period are clear, and the reasons for unsatisfactory results usually fairly easy to diagnose. The Inspectorate’s limited set of core tasks was never easy to accomplish. There was resistance, foot-dragging and lack of political support, as well as tax inspectors being frequently robbed at gunpoint in remote and uncongenial locales. But the basic task requirements – extension of control over the salt tax environment, shoving out competitors such as salt merchants and other salt tax collection regimes, and rationalisation and simplification of tax collection procedures and rates – had the virtue of being easy to monitor and relatively straightforward to either advance towards or tactically retreat from. Successful projects could be readily monitored, and, circumstances permitting, rapidly replicated in other districts. The predations of an individual warlord or even the loss of a whole region, as the entire north-east was lost in 1931, could be contained because of the high degree of divisibility, measurability and specificity of the organisation’s key technologies. Divisibility, measurability and specificity all lent
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themselves to the kinds of impersonal rule-making at the core of bureaucratisation. Norms of impersonal bureaucracy suited both internal processes of organisational insulation and external processes of goal achievement. Furthermore, the external goals themselves were inherently achievable through processes of centralisation, standardisation and rule application. 9.4
The survival of the Inspectorate in harsh environments after 1927
In 1927, the Salt Inspectorate was temporarily felled by a blow that could easily have permanently ended its existence. It was abolished by a new, aggressively nationalist government. Yet the Inspectorate revived almost immediately under the Nationalist government in 1928 and until about 1938 seemed to have expanded its influence, despite the changed circumstances of its operation. Unsurprisingly, along with Maritime Customs, the other substantive independent tax-collecting agency of the time, the Inspectorate was put on a much shorter leash. It came under the jurisdiction of the Ministry of Finance, but with an odd formal status of semiautonomy.12 Crucially, it was permitted to retain its separate civil service core with its separate personnel grades, entry examinations and higher salary scales, as well as the initial preservation of the co-equal status of Chinese and foreign district inspectors. The Ministry of Finance took over the actual repayment of the Reorganisation Loan. The political position of the Inspectorate was, however, even more difficult with an explicitly nationalist government in power.13 The
12
13
This was even formally designated in the title of the Inspectorate under the Nationalists. ‘Regular’ divisions under the Ministry of Finance were called si; semi-autonomous entities such as Maritime Customs and the Salt Inspectorate were allowed to retain their own personnel systems and salary scales, and were formally designated shu, which carried the connotation of substantial autonomy. The Sino-Foreign Salt Inspectorate (Yanwu Jihe Zongsuo) became the Salt Inspectorate Special Division (Yanji Shu) under the Ministry of Finance in 1928. Then as part of the wider reorganisation of the Ministry of Finance, it again changed name to the Directorate-General of Salt (Yanwu Zongju) in 1936. It also formally absorbed what remained of the Inspectorate’s old rivals in the Salt Division (Yanwu Si). Although the Nationalist government was on paper characterised by a system of divided powers, with nominally co-equal top government bodies (i.e. the Executive, Legislative, Judicial, Control and Examination Yuan), real power was concentrated in a few ministries under the Executive Yuan and the Military Affairs Commission. The fact that members of weak organisations such as the Legislative, Control and Examination Yuans could launch attacks against the Inspectorate that were taken very seriously by the organisation illustrates its political vulnerability after 1927.
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heavy foreign presence at the top and its separate personnel system consistently attracted ire, administrative pressure and even outright attacks. Nationalist legislators in the Legislative Yuan, a rubber stamp parliament and members of the Control Yuan found the heavy foreign element reminiscent of imperialism and worse. Groups of bureaucratic rationalisers elsewhere in the government, notably in the Examination Yuan, were offended by the Inspectorate’s bureaucratic resistance to its own attempts to impose a standard system of bureaucratic classification and grades across the government as a whole. The attitude of the organisation’s new direct bosses in the Ministry of Finance was ambivalent, as they ‘veered from wanting to use the Inspectorate and control it’ (Strauss 1998: 93). There was genuine admiration for what the Salt Inspectorate had managed to accomplish against long odds. But there was also substantial resentment over the foreign presence in the tax administration Foreigners who enjoyed co-equal administrative authority with their Chinese counterparts were deemed to be particularly obnoxious, as were the Inspectorate’s higher salaries compared to the regular civil service. In the 1930s, the upshot of this ambivalence was a kind of informal power sharing. This was not without stresses. The old Inspectorate staff heartily disliked the new Chief Chinese Inspector, who was the lone political appointee in the new Nationalist regime. Under Nationalist rule, the positions of the foreign staff gradually declined from co-equal status in signing orders to, by the end of the 1930s, a mere ‘advisory’ role. However, in less obvious ways, the Inspectorate actually increased its informal influence under the Ministry of Finance. First, it convinced the Ministry of Finance to allow it to subsume the two other major players in salt tax; the Yanwu Shu was amalgamated into the Inspectorate in 1931, and the paramilitary Salt Police followed in 1932–3. Second, the Inspectorate attracted enough admiration from tax reformers and institution-builders that the organisation and operations of the Ministry of Finance’s new Consolidated Tax Administration were directly modelled on the Inspectorate – minus the heavy foreign presence at the top.14 The Consolidated Tax was an indirect commercial levy on a range of factory-produced commodities, with machine-rolled and flue-cured tobacco as the most important, followed by flour, cement, matches and cotton yarn. The Consolidated Tax mantra of ‘one item, one tax’ levied at the site of production sounded suspiciously like the Inspectorate’s slogan of ‘taxation at the yard and free trade thereafter’. Its policies of central control, amalgamation and standardisation, and the organisational model
14
This discussion is drawn from Strauss (1998: 126–33).
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of highly paid experts who frequently rotated among district offices reflected the Inspectorate’s lead. The Consolidated Tax stands as one of the key arenas of National government institution-building during the Nanjing Decade (1927–37), gradually expanding in both absolute and relative terms to provide roughly 20 per cent of the government’s tax revenue by 1937, from roughly 12 per cent in 1929. The reasons for the relative success of the Consolidated Tax were not only its imitation of the Inspectorate’s organisational form and core ideology, but that it operated in a tax domain that was strikingly similar to that of the Inspectorate. Both had at their core a single tax on easily measured and divisible products produced in concentrated and controllable geographical space. Consolidated Tax expanded outward from both its geographical core around Shanghai and in terms of the commodities it sought to tax. It did so in an incremental way, so that its capacity to assess and collect the tax was not overstretched. Other, more ambitious, tax initiatives fared much less well. In 1936, for instance, the Ministry of Finance established a new Direct Tax Administration that was also modelled on the Inspectorate, but it did not achieve the outstanding results of the Inspectorate or Consolidated Tax (see Strauss 1998: 133–9). Ambitious programmes for direct income tax, inheritance, savings, property and windfall profits were simply beyond the technical and manpower capacity of even the most objectively selected, highly qualified young technocrats. The outbreak of the Sino-Japanese War and the subsequent loss of the Guomindang’s military, political, economic and social base in east China put such programmes even further out of reach. The incorporation of the Inspectorate into the Ministry of Finance worked well in the 1930s for two reasons. First, it continued to collect revenues that were so necessary to the still weak and highly militarised National government. On several occasions both before and after 1927, the Inspectorate quite literally had to buy its autonomy – in both the warlord and Nationalist years. No regime could afford to kill a goose that laid so many golden eggs on such a regular basis and with so little squawking and fuss. Less obvious but no less important was the way in which the rhetoric and core ideology of the Inspectorate made it possible for it to take a kind of refuge in its own administrative depersonalisation and bureaucratisation. In its insistent self-representation as an administrative machine, willing and able to bow to the will of political masters, it ensured its own organisational survival and gained unexpected influence with the new regime after 1927. The Inspectorate staff disapproved of pressures from above to raise tax rates continually but responded to properly constituted authority in the only appropriate way: with compliance. Despite pressures and agitation from elsewhere
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in the government, the political masters in the Ministry of Finance for the most part left the Inspectorate alone to get on with the job. More than that, it even explicitly and implicitly used the Inspectorate as a model when setting up a new tax authority. However, the good performance of the Inspectorate was not as replicable in other, more diffuse areas of taxation as the technocrats in the Ministry of Finance probably would have hoped for. 9.5
Concluding remarks
The Salt Inspectorate of Republican China worked extremely well in a hostile and fraught policy environment. It managed to survive its abolition and revival under a new and suspicious government, where it even became a model that also worked reasonably well when the tax regime conditions were broadly similar. What undid the Nationalist regime in Republican China was not poor performance in terms of key institutions of state such as tax. It was overwhelmed by war, losing its economic, social and political base in east China and then losing control over the economy. The Inspectorate is an example of how oddly and surprisingly ‘bureaucracy’, as reflected in impersonal rules, standardisation and central control, can be effective under some conditions, and how bureaucracy can be built from relatively little. But the history of the Inspectorate also shows some of the limits of technocratic bureaucracy, particularly those of a semi-autonomous nature. The power and influence of technocrats come from their expertise in speaking truth to power and submitting to political power. But in the long run, speaking truth to power, or maintaining a semi-autonomous tax administration, depends on political leaders who are willing, or able, to ‘hear’ what is being said and act accordingly.
10
Tax reform and state-building in a globalised world Odd-Helge Fjeldstad and Mick Moore
10.1
Introduction
As Benjamin Franklin had intended to say, there are three things in life about which one can be certain: death, taxes and tax reform. Rare is the government that does not make numerous annual modifications to its tax system. Almost as rare are tax changes that are fully comprehensible to the average person in the street. Amendments typically concern the definition of ‘allowable expenses’ for investments, the standard of handwritten receipts acceptable for sales tax administration or the cut-off dates for appeal against income tax assessments. Dramatic changes in systems or rates are the exception. To the worm’s eye, tax reform is a continuous stream of small, technical modifications to law and procedure that reflect specific national circumstances, the lobbying of diverse local interest groups, and the continual efforts of public finance specialists to reconcile the competing objectives of governments’ fiscal activities.1 The bird’s-eye view is very different: there are global patterns of tax reform. Public finance has always been one of those domains where governments generously borrow ideas and institutional technologies from one another. Social welfare systems, for example, differ widely from one country to the next. By contrast, national tax systems, like central banks, seem more like members of a distinct global family. Their family resemblances have become stronger over the past two or three decades. Most governments have participated in a genuinely global process of tax reform, affecting rich and poor countries alike. Participation has required them first to change attitudes to the tax system. It should no longer be seen as an instrument to be employed in an active way to achieve a wide variety of socioeconomic policy goals through fine-tuned interventions. In 1
In making tax decisions, governments typically have to balance their immediate revenue needs against a range of other factors: the advice they receive about macroeconomic management; political demands from a range of interest groups; the possible effects on the incentives facing the private sector; and potential long-term consequences for their capacity to raise revenue in the future.
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developing countries in particular, governments have been urged to desist from using taxation to try to mobilise savings or to transfer resources from agriculture to non-agriculture; to rely less for revenue on easily taxable imports and exports; and to place less emphasis on using high marginal tax rates in the effort to reduce income and wealth inequality (Bird and Zolt 2003; De Mooij and Ederveen 2003; Goode 1993; Stewart 2002; Tait 1989; Tanzi 2000; Tanzi and Zee 2000a; Thirsk 1993). The overall message is that, if used too eagerly and frequently, taxation becomes a blunt, ineffective or perverse policy instrument. Governments should concentrate on establishing simple, predictable, neutral tax systems that will not discourage private enterprise and will minimise interference with market signals. Most governments have followed this advice to some extent. We can usefully talk of a global reform programme. In addition to the general shift away from actively using the tax system to pursue other socio-economic goals, this global reform programme has three main substantive elements: (1) the introduction of broad-based consumption taxes (e.g. value added taxes), (2) simplified tax design and (3) improved tax administration.2 1. Value added tax (VAT) has emerged rapidly to become one of the main modes of revenue raising worldwide. First introduced in France in 1948 and in Brazil in 1967, VAT is now in place in more than 130 countries. During the 1990s, the number of African countries levying a VAT increased from two to thirty. Although it has not been introduced in the United States, VAT accounts for around a quarter of the world’s tax revenue (Ebrill et al. 2002). In richer nations, it has in part replaced other sales and consumption taxes. Because it is such an efficient means of sucking in revenue from economies with good written or electronic records of economic transactions, VAT has facilitated trade liberalisation by replacing import and export taxes, and also contributed powerfully to the steady increases in governments’ shares of rising national incomes. In poorer nations, where governments have traditionally been especially dependent for revenue on trade taxes, the promotion of VAT has been even more closely tied to trade liberalisation.3 2. There has been a strong emphasis on ‘simplification’: on trying to make taxes clearer, more transparent, more predictable, easier and
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This list, or something similar, appears in many publications. For example, James Mahon found that, in Latin America ‘the definition of ‘‘tax reform’’ has been remarkably similar across the region, with less progressivity, fewer exemptions, and a new leading role for the value-added tax (VAT), and the strengthening of tax administration’ (Mahon 2004: 3). For an extensive discussion of VAT in poor countries see Bird and Gendron (2005).
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cheaper to administer and less vulnerable to extortion and corruption. In practice, simplification means reducing a lot of things: the discretion of tax administrators or politicians to decide on tax liabilities for particular companies, types of investment projects or category of imports; the number of different taxes; the number of schedules or rates for each type of tax; tax exemptions; the extent of progressivity of tax rates; high marginal tax rates; and the number of procedures required to assess and collect taxes and adjudicate disputes.4 3. There has been a related emphasis on reforming tax administration, often under the slogan of ‘tax administration is tax policy’. The content of administrative reform in specific countries has depended a great deal on what was already in place (Bird, Martinez-Vazquez and Torgler 2004; Owens and Hamilton 2004). Some of the more widespread components include exploiting the potential of new information and communication technologies; moving from a system organised around different taxes to one organised around localities and/or industries, so that individual taxpayers have to deal with fewer tax officers; introducing unique identification numbers for each individual taxpaying unit; establishing different offices and procedures for different categories of taxpayer, typically starting with the creation of a Large Taxpayer Unit focusing on big companies; trying to make the collection process more ‘user-friendly’; in Latin America, in particular, using commercial banks as collection agents; using audit units more selectively and strategically to check on the performance of the primary tax collectors; and, as we discuss in more detail below, giving tax collection agencies the status of semi-autonomous revenue authorities. The logics of simplification and of improving tax administration are closely linked, through the argument that tax agencies will be more effective if their tasks are made more simple, stable and predictable. Our purpose in this chapter is to assess how far this global wave of tax reform has contributed to state-building. Our summary conclusion mirrors other arguments about globalisation more generally: there are many good things to report, but worrying problems in the poorest and most dependent countries. The governments of those countries have little choice but to go along with a reform agenda that is not strongly rooted in their particular circumstances. The choice of policy problems, and of the means of dealing with them, reflect too much the enthusiasms of the more powerful actors in the international system. More important 4
There is a current trend toward ‘flat taxes’ – i.e. the use of a single rate for each tax – which has been especially powerful in Central Europe. It represents an extension of the principle of simplification.
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perhaps, the global reform agenda does not address some of the more urgent problems that the poorest countries face. The contemporary global tax reform agenda is least appropriate to those countries most in need of the state-building to which the taxation process has contributed at other places and times (see Chapters 1, 2, 3 and 6 in this volume). We develop that argument in Section 10.3, after first exploring how this global reform agenda has been shaped. 10.2
The global drivers of tax reform
There is little doubt about the identity of the number one driver of the global tax reform agenda: the International Monetary Fund (IMF). Whether or not policy-makers from developing countries go to the IMF for advice about tax, the IMF comes to them in a rather authoritative way. Actual decisions about substantive tax reform are especially likely to be made at moments of economic stress or crisis. These are exactly the occasions when IMF teams are likely to be in town and able to exercise influence. James Mahon (2005) has demonstrated a strong statistical connection between the incidence of tax reform and the existence of explicit IMF performance conditions in Latin America from 1977 to 1995. But crisis and pressure are not the only or even the main channels through which the IMF exercises its influence. Public finances and monetary policy are its mandate. It has been a major source of expertise, ideas and publications on tax reform for poor countries for several decades. A high proportion of the professional literature on the topic emanates from the IMF, with the World Bank, the Organisation for Economic Cooperation and Development (OECD) and the World Trade Organisation (WTO) playing complementary but smaller roles.5 This is enough information to generate a strong hypothesis: that the global tax reform agenda has been set by the international financial institutions – the IMF, the World Bank, regional development banks, aid agencies and the like – in pursuit of the same kinds of objectives that they have putatively been advancing worldwide by other means, notably the neo-liberal agenda of strengthening markets and weakening states, trade unions, popular political movements and other loci of organised political power. There is sufficient supportive evidence that we cannot dismiss the hypothesis out of hand. Look again at the main components 5
These organisations do not always see eye to eye. For example, the IMF is concerned principally with the immediate fiscal and macroeconomic impact of decisions about tax, while the World Bank is more likely to raise less pressing issues, such as the microeconomic implications for the efficiency of resource allocation.
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of the global tax reform agenda. The replacement of trade taxes by VAT has resulted in significant losses of revenue for the governments of the poorest countries (Baunsgaard and Keen 2005). The most prominent single reform in tax administration – the creation of semi-autonomous revenue authorities independent of finance ministries and manned by highly paid professionals, often recruited from the private sector – looks like an attempt to curb state power and is perhaps a step on the road towards the privatisation of tax collection. It is, however, hard to sustain the argument that the global tax reform agenda constitutes a significant neo-liberal project to weaken the state. One piece of counter-evidence is that there have been few serious attempts to outsource or privatise the tax assessment and collection processes.6 The granting of a degree of managerial and strategic autonomy to tax administrations by creating semi-autonomous revenue authorities is in line with standard public sector reform practices in many countries; there is no reason, in logic, experience or intention, to see it as a prelude to privatisation. A second, more powerful, piece of counter-evidence is that the IMF and other international financial institutions often actively encourage governments of poor countries to increase their tax revenues.7 As we mention later in this chapter, IMF pressure to raise revenues sometimes appears excessive. That is quite consistent with the role of the IMF in the global financial system. It has a strong mandate to ensure that governments can raise sufficient revenue, in a reliable and sustainable fashion, to continue to pay interest on their loans, repay their debts and borrow again. From the fiscal perspective at least, the IMF prefers strong rather than weak states (Mahon 2005: 25). To understand the global character of the tax reform agenda, we need to look more closely at the sociology of organisations, knowledge and the diffusion of institutional innovations. James Mahon makes the point in a nutshell: ‘tax officials in the western hemisphere (and especially those from Latin America) constitute an increasingly distinct social 6
7
There are marginal exceptions. As we mentioned above, in some Latin American countries, commercial banks have been subcontracted to receive tax dues. For some years, the collection of customs revenues in Mozambique has been subcontracted to Crown Agents, a not-for-profit British company owned by a number of public agencies. That arrangement is, however, to be terminated, mainly because the reforms have achieved few lasting results – the transfer of skills by foreign contractors has been limited and the contract has been very expensive for the government. There is no compelling evidence that the privatisation of tax collection is a feasible means of dealing with corruption and other problems. Increasing government revenue was a major objective of two-thirds of projects to reform taxation and customs that were financed by the World Bank in the 1990s (World Bank 2000: 1).
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network and epistemic community, perhaps best exemplified by the activities of CIAT (Centro Interamericano de Administraciones Tributarias), founded in 1967 and based in Panama’ (Mahon 2005: 24–5). The processes to which Mahon points appear to be especially intense in Latin America but are increasingly evident elsewhere in the world. Tax administration and law are highly specialised subjects. Tax professionals naturally talk to one another when they can. The same technological changes and political and economic processes that have supported globalisation generally in recent decades have strengthened international professional networks and institutions in the tax business. In 2001, CIAT joined a number of other regional professional groups to create a global professional forum, CIOTA (the Committee of International Organisations of Tax Administrations).8 The World Customs Organisation, an intergovernmental organisation founded in 1952 and currently claiming 169 members, is also an important global forum for tax professionals. Taxpayers too have begun to organise at the global level.9 The political and intellectual impetus behind global tax reform does not come only from international organisations like the IMF. There is also an increasingly organised epistemic community of tax professionals, which includes employees of national tax administrations and of international organisations such as the IMF, and economists, accountants and lawyers specialising in taxation in academia and in consultancy organisations including, increasingly, the big transnational consultancy companies. The coherence and simplicity of the global reform agenda seems to result from a strategic selection process. A group of actors who have little direct political power but a claim to highly specialist expertise are better able to exercise influence if they are united around a policy agenda that is comprehensible, coherent and convincing to those who do hold political power.10 In this case, the process of strategic selection has been successful 8
9
10
The African Association of Tax Administrators (AATA), the Caribbean Organisation of Tax Administrators (COTA), the Centre de Recontres et d’Etudes des Dirigeants des Administrations Fiscales (CREDAF), the Commonwealth Association of Tax Administrators (CATA), the Intra-European Organisation of Tax Administrations (IOTA), the Organisation for Economic Cooperation and Development (OECD) and the Study Group on Asian Tax Administration and Research (SGATAR). The World Taxpayers Associations was established in 1988, in the USA, with a militantly anti-tax mission statement. Its website currently lists fifty-five member organisations in forty-one countries; twenty-one of those member organisations were founded between 1990 and 1999, and another twenty between 2000 and 2006. www.worldtaxpayers.org. This interpretation of the global tax reform agenda is informed by contemporary political science research on the international diffusion of institutional innovations. Where the reform impacts on specialised organisations such as tax administrations, the key decisions about reform design typically are made by small bureaucratic, professional and political elites. Their perceptions of what is desirable and possible are key. Weyland (2005: 23–4)
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in effecting real policy change. There is strong contrast between the contentiousness, especially in Latin America, of the overall neo-liberal (or ‘Washington Consensus’) economic reform agenda and the fact that the tax policy components have been widely adopted with little protest or overt debate.11 Given a relatively united front between the tax professionals, the IMF and other international financial institutions and the tax economists, much tax reform passes as necessary modernisation of an essentially technical character. Is there actually a united front? Not entirely. In particular, there is some disjuncture between actual tax reform practices and some of the nominal policy implications of the set of new, big theoretical ideas about tax that have animated most academic economists’ discussions of the topic in the two recent decades: ‘optimal tax policy’. The core ideas behind optimal tax policy are that all taxation distorts market incentives, and that tax policy and reform should be significantly or largely driven by the search for systems that minimise these distortions through treating similarly placed economic actors in similar ways (Ahmad and Stern 1991; Slemrod 1990; Stern 1987). Optimal tax policy is highly congruent with the emphasis on reducing the heavy revenue burden borne in many poor countries by trade taxes. However, most potential practical applications of the principles of optimal tax policy require a level of detailed information and calculation about the behaviour, actual and prospective, of different categories of taxpayers that is inconsistent with a practical emphasis on administrative simplicity. While the research publications of the IMF might suggest that notions of optimal taxation drive its approach to revenue issues, its operational advice is much more pragmatic. Because the global tax reform agenda reflects a degree of compromise, some contradictions are organised into it. That concerns us less than the
11
explores the role in such cases of ‘the three principal heuristics documented by cognitive psychologists’: availability (i.e. disproportionately powerful impact of close, vivid events, including experiences from neighbouring countries); representativeness (i.e. the tendency to see clear patterns in very limited data); and anchoring (i.e. the way in which initial clues strongly condition later judgements, leading, among other things, to a tendency to import foreign models with little adaptation). Weyland (2005: 37–8) concludes that Bolivia adopted the Chilean ‘neo-liberal’ pensions system because Bolivian elites convinced themselves of its appropriateness through the kind of reasoning outlined above, and in the face of some opposition from the IMF and other international financial institutions. It is true that there have been anti-VAT riots, with deaths, in both Ghana and Uganda. The structural reason is that VAT imposes major tax compliance costs on small businesses (Chapter 2). In Ghana, at least, the riots can be attributed to political mismanagement: too rapid an introduction, with inadequate consultation with the small traders most adversely affected (World Bank 2001). In addition, because VAT can provide an effective way of reducing tax evasion in wholesale activities, larger traders may also be opposed. Organised networks of wholesalers and retailers fought a long rearguard action against the introduction of VAT in India.
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fact that a substantial number of issues – those more or less specific to the poorest and least influential countries – are to a large extent organised out of it. We would not argue that the global reform agenda is intrinsically wrong for the poorest developing countries. But it is certainly not entirely appropriate. We can best make this point by examining the various ways in which tax reform might contribute to state-building. 10.3
The potential contributions of tax reform to state-building
Let us define state-building broadly as increasing the capacity of governments to interact constructively with societal interests, to obtain support and resources from those interests, and to pursue consistent lines of action. Tax reform might contribute to state-building through four main channels: through (1) providing revenue; (2) shifting towards more appropriate revenue sources; (3) creating more effective tax administrations; and (4) encouraging constructive state–society engagement around taxes. We examine separately the impact of the global tax reform agenda on each of these potential channels for state-building. 10.3.1 Providing adequate revenue Except in times of war and crisis, government revenues tend to be very sticky: they change little from one year to another.12 They tend in the longer term to increase as incomes increase (see Chapter 2 in this volume). Currently, the average ‘tax take’ in high-income countries, at around 37 per cent of GDP, is more than twice the figure for low-income countries – 14 per cent. Taking all countries for which there are reliable data, the average tax take changed little between 1975 and 2000. The differences between the trends for high-, middle- and low-income country groups are however significant. The tax take increased steadily in the high-income group, declined very slightly in the middle-income group and declined more markedly in the low-income group (Baunsgaard and Keen 2005: 7). Why? Poorer countries historically have depended heavily on taxes on imports and exports (‘trade taxes’). In poorer and more agrarian environments where effective ‘tax handles’ are relatively scarce, governments find 12
Recent exceptions consist mainly of cases of rapid recovery from sharp declines in revenue during periods of acute economic and political crisis. For example, after President Museveni re-established political order in Uganda, the tax take rose from 7 per cent of GDP in 1991 to 12 per cent in 1996 (Katusiime 2003).
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it easier to raise revenue by concentrating their tax collectors on customs posts at their borders. Because so many developing countries have fitted into the global division of labour as exporters of primary products, international trade has been the obvious place for their governments to gather revenue. In 1975, trade taxes were a very minor source of government revenue in high-income countries but were significant in both middle- and low-income countries. An important component of the global tax reform programme, backed by economists’ denunciations of this tax bias against international trade, was the reduction of trade taxes and an increasing emphasis on broad-based consumption taxes such as VAT. Total trade tax revenue to governments of low-income countries began to decline in the mid 1980s. Baunsgaard and Keen (2005) estimated that, by 2000, governments of middle-income countries had found other means to replace about 45–60 per cent of the trade revenues they had forgone, while for low-income countries the figure was at best around 30 per cent. And the presence of a VAT seemed not to have helped at all. We can conclude that, in respect of total government revenues, the global tax reform agenda has failed the poorer countries. It has not lived up to the promise of delivering the revenues that they undoubtedly need through replacing trade taxes with VAT and by broadening the income tax base while lowering the rates. Why they have failed is less clear. The most direct explanation is that, in many poorer countries, VAT is harder to collect – unless it is collected at the border like a trade tax. Governments that face civil conflict and a variety of other challenges to their authority in general do not have the organisational capacity to make a successful transition to a more demanding revenue source. Moreover, the VAT base is often undermined by extensive exemptions and zerorating.13 The effectiveness of VAT depends in large part on good bookkeeping and reliable self-assessment. Specialists have long been warning
13
However, there may be another element to the story. Over the same period, from the 1980s, development aid has increasingly been focused on poorer countries, especially in Africa. Many found themselves receiving aid that amounted to a large fraction of their GDP, and the bulk of government spending. The most careful analyses we have suggest that high levels of aid do tend to reduce governments’ own revenue-raising efforts (Bra¨utigam and Knack 2004; Moss, Petterson and van de Walle 2006). It is possible that VAT failed to replace trade taxes in part because simultaneous increases in aid left governments less motivated to make a success of the new VAT than they would otherwise have been. We know that the governments of many countries implement VAT in halfhearted ways (Baunsgaard and Keen 2005: 23). It is not possible to test the main proposition through statistical analysis of data from a large number of countries, because, for poorer, aid-dependent countries, data on public finances tend to be patchy and unreliable.
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that it would not work well in countries where these conditions are not in place. Even within rich countries, VAT provides great opportunities for fraud and corruption. VAT is not the wrong tax for poorer countries, but it has probably been extended too widely and too fast. 10.3.2 Shifting towards more appropriate revenue sources Leaving aside the impact on overall revenue levels, does the global tax reform agenda represent a shift of the tax burden towards more appropriate revenue sources? Predictably, the bulk of the discussion has focused on the ways in which the reforms might have affected income distribution and economic incentives. Reductions in the degree of progressivity of income tax rates should favour the rich, and a shift towards any consumption taxes, such as VAT, will tend to bear relatively heavily on the poor. Conversely, the proponents of the reforms tend to argue that simplified systems are more efficient at raising money from those who should pay, and therefore tend to reduce inequality (Bird 1992; Khalilzadeh-Shirazi and Shah 1991; Tanzi and Zee 2000a; Thirsk 1993). Having reviewed the evidence recently, Gemmell and Morrissey (2005) find no clear patterns and conclude that there is no evidence that the tax burden has in general been shifted towards the poor. The distributional impact of those tax reforms that have been introduced is a significant, unresolved issue. We focus here on those taxes and policy measures that are or could be especially important to poor countries but do not feature on the global tax reform agenda, either because the poorest countries had little influence on constructing it or because the actors and situations that most influenced it – taxation professionals, the international financial institutions, transnational consultancy firms and debates about tax policy in richer countries – gave priority to other concerns. There are three such issues: the informal sector, urban property taxes and tax exemptions for aid funds. 1. Taxing the informal sector. In many poor countries, as Anuradha Joshi and Joseph Ayee explain in Chapter 8, economic activity is increasingly located within the informal sector. That sector is hard to tax. Tax administrations tend to give it little priority, because, in cash terms, returns on effort may be low. Their employees will avoid it if they can, because it is certainly unrewarding in terms of income supplementation, and likely to be unpleasant, difficult or even dangerous. Yet, as Joshi and Ayee explain, there are good public policy reasons for paying more attention to taxing informal urban economic activity, both in terms of governance concerns about the spread of the tax net and in order to explore alternative ways of building the capacity to tax
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the sector more effectively in the long term. Joshi and Ayee explore unorthodox tax collection mechanisms that, at least initially, do not require existing tax collectors to engage closely with informal sector operators. Finding better ways of taxing the informal sector is in practice not on the global tax reform agenda. There are frequent mentions of the need to ‘broaden the tax base’, but this seems to refer more to reducing exemptions and closing loopholes than to any notion that the informal sector needs to be tackled as a generic issue. Implicitly, it is hoped that the informal sector will be brought into the tax net through the gradual expansion of the scope of VAT, which has a very ‘thin’ coverage in many poorer countries (Bird and Wallace 2003; Terkper 2003). 2. Taxing urban property. The governments of most developing countries should be actively concerned with improving their urban property taxation systems and using them as a means to raise more revenue.14 There are three reasons for this. One is that property incomes and property wealth are significantly under-taxed, and thus an important source of inequity. The second is that property taxation is one of few potential sources of significant income for many of the municipal and metropolitan authorities to whom central governments have devolved increased responsibilities without commensurate increases in fiscal transfers (Bird and Slack 2002; Dillinger 1992; Mikesell 2003). The third is that the digital databases that provide the core of modern property registers create strong synergies between urban property taxation and urban planning. From a logistical perspective, taxing urban property is much easier now than in the past. Yet, property taxation does not feature significantly in the global tax reform agenda, or in the various tax policy guidelines emanating from the IMF. Although some of the operational staff of international development institutions have shown more interest in this issue recently in the context of the need to finance decentralised urban administrations, there has been little practical progress. Why so little concern with this issue? There are three plausible explanations; each probably plays some role. One is that property taxation is the domain of subnational governments, and the IMF in particular, with its strong mandate to deal with macroeconomic issues, relates almost
14
In most poor countries, the scope to tax most rural and agricultural properties is very limited for a combination of practical and political reasons (Skinner 1993). While there are possibilities for more effective taxation of larger and corporate agricultural enterprises through income taxes in particular, there seems to be little potential in agricultural property taxes.
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exclusively to central governments. The global tax reform agenda applies almost exclusively to central government revenues. Second, the establishment of effective property tax systems is a long-term enterprise that requires considerable early investments.15 This has been much less attractive a focus than the introduction of VAT, which generates more revenue in relation to effort in the medium term. The third is that the content of the global tax reform agenda is directly influenced by the recent experiences and practices of the OECD countries, especially the Anglophone OECD countries. Property taxes have historically been more important in the USA and the UK than in most OECD countries. But they have in recent decades been increasingly unpopular with wealthy and articulate taxpayers and have diminished in importance (Heady 2002). According to Richard Bird, possibly Latin America’s most distinguished expert on public finance, this hostility has spilled over into the development policies of the rich countries: Consider, for instance, the sad story of property taxation in North America. Once seen as the bulwark of local democracy and accountability, this tax has, over time, come to be considered by the public at large as regressive and unfair, thus fostering elite interests in lowering the tax burden on an asset base they disproportionately control. The spillover of the anti-property tax rhetoric into even more unequal societies to the south has made it even more difficult to institute . . . even the low-rate effective property taxes needed to finance local governments. (Bird 2003: 44)
3. Tax exemptions for aid funds. One of the more murky aspects of the development aid business that has effectively been kept off public development policy agendas, including the global tax reform agenda, is the fact that aid agencies successfully demand substantial tax exemptions in the countries they assist: exemptions from customs duties for imports earmarked for aid projects or the in-country use of aid agency staff; exemptions from income taxes for expatriates employed by aid donors; and exemptions from VAT and a range of taxes for foreign companies, such as construction companies, employed in-country by aid donors. This is not principally an issue about the amount of income coming to the recipient government: since most aid goes to governments, they will receive the money either
15
McCluskey and Franzsen (2005) have recently examined in detail property taxation in fifty-three countries, mainly in the developing world. They point to the high level of underperformance of the tax. One reason is that many countries employ systems of property valuation that are far too complex. In India in particular, some urban authorities are moving toward more simplified, practical valuation systems.
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as aid or as taxes – provided the exemption system is not exploited and used as a cover for fraudulent tax exemptions for non-aid activities.16 However, it seems likely that in some cases it is abused in this way. It matters more that this practice sets a bad example: it encourages other people also to demand tax exemptions. We know, although we lack good data, that many of the successes of the global tax reform agenda in simplifying tax systems and abolishing exemptions are continually being undermined by the granting of fresh exemptions by politicians. The exemptions for aid inflows are implicated in that, at least indirectly. Equally, the collective decision by aid donors to provide money to recipient governments as grants or loans when they could choose to allow it to be transferred as tax revenue represents a missed opportunity to encourage recipient governments to strengthen their tax systems and wean themselves off aid more quickly. However, aid agencies appear to prefer to maximise their own budgets and to avoid parliamentary questions at home about why some of ‘our’ aid intended to help poor people is going in taxes to (undeserving) governments.17 10.3.3 Creating more effective tax administrations Nuts-and-bolts organisational reform The notion of ‘improving tax administration’ is so open and ill defined that it may be difficult to imagine how it could have become one of the pillars of the global tax reform agenda. That openness may be part of its attraction. It is not, nevertheless, empty rhetoric. Over the last two decades, there has been a real interest in tax administration among tax professionals worldwide and considerable actual reform. This is probably in part because of the simultaneous spread of digital information and communication technologies which, in tax administration as much as in other organisational arenas, have made possible a range of new ways of organising and working. Some of the more significant changes facilitated by digitalisation include 16
17
In Tanzania in 2005, 17 per cent of the gross value of customs duty exemptions was directed to aid donors, and another 3 per cent to NGOs. It is possible that, in addition, some of the exemptions granted to private companies were for aid-funded activities. (Data kindly provided to Fjeldstad by the Tanzania Revenue Authority.) International Tax Dialogue (www.itdweb.org), representing mainly international organisations – the IMF, the Inter-American Development Bank, the OECD and the World Bank – produced in 2006 a detailed paper on this issue, making the case for trying to reduce exemptions (International Tax Dialogue 2006). The paper was discussed at the United Nations Committee of Experts on International Cooperation in Tax Matters, where it appears to have been effectively buried owing to the resistance of bilateral aid donors.
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introducing unique identification numbers for each individual taxpaying unit;
moving from a system organised around different taxes to one organised around localities and/or industries, such that individual taxpayers have to deal with fewer tax officers; establishing separate offices and procedures for different categories of taxpayers, typically starting with the creation of Large Taxpayer Units focusing on big companies; beginning to physically separate ‘back office’ functions of assessing tax liabilities and auditing and cross-checking records from ‘front office’ functions of actually collecting money, to reduce the scope for direct extortion and bribery.18 In addition, there has been a very substantial shift in the attitudes of tax administrations towards taxpayers. Stimulated in part by research about factors affecting tax compliance conducted first in the USA (see Slemrod 1992) and later in other OECD countries, including Australia (see Braithwaite 2003), ‘customer service’ and ‘user friendliness’ have become the norm. National tax administrations have been eagerly emulating one another in opening customer-friendly ‘one-stop shops’, simplifying procedures, making possible on-line filing of returns, providing extensive information for taxpayers in printed and digital form, and trying to explain themselves to their ‘customers’. The mission statement of the Tanzania Revenue Authority – to be an effective and efficient tax administration which promotes voluntary tax compliance by providing highquality customer services with fairness and integrity through competent and motivated staff – might have come from any of several dozen tax administrations in the Anglophone world. The South African Revenue Service, one of the more successful of the new tax administrations, widely advertises that ‘your taxes paid for this road/school/hospital’ – and simultaneously works publicly with the Scorpions, a tough special crime investigation unit attached to the National Directorate of Public Prosecutions, to deal with suspected high-profile tax defaulters. It is evident that much of the new ‘user-friendliness’ of many tax administrations is so far mainly window dressing: taxpayers continue to experience extortion, bribery and obstructiveness rather than willing, responsive service. It is also clear that ‘user-friendliness’ is most widely practised in, and is most appropriate to, the relations between tax 18
Bergman’s comparative study (2003) of Argentina and Chile illustrates how differences in the organisation of tax collection, including the internal separation of functions and the appropriate use of audit units, impact in the long term on tax collection capacity and taxpayer compliance.
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administrations and their larger corporate clients. However, although we have no basis on which to measure improvements in tax administration, there are very clear signs of progress with the kinds of detailed, nutsand-bolts innovations mentioned above. The big hit: autonomous revenue authorities Only a small amount of the current literature on reforming tax administrations in developing countries deals with these nuts-and-bolts reforms. The focus is rather on the major visible change: the creation of new (semi-) autonomous revenue authorities (ARAs), such as the URA (Uganda Revenue Authority), SARS (South African Revenue Service), SUNAT in Peru (National Superintendency of Tax Administration) and many others. Aid agencies and international financial institutions have in practice tended to concentrate their tax work on support for the creation of ARAs.19 As of March 2006, there were about thirty autonomous revenue authorities in the developing world, largely in Africa and South America, most of them recent creations.20 What are ARAs? There is no clear definition. They are relatively diverse. Their defining feature is (some) autonomy: the revenue collection function typically is removed partly or fully from the direct control of the Ministry of Finance, and those who direct the ARA have more or less independence to structure and manage it, including hiring and firing of staff.21 As we explain below, the notion of autonomy is contested and potentially misleading, both conceptually and practically. In many cases, the creation of ARAs involved (a) a major internal restructuring and 19
20
21
For example, a review of the eighty-three projects to reform taxation and customs that were financed by the World Bank in the 1990s concluded that ‘Few projects, however, addressed the need for better customer service or tested promising new approaches to taxation, such as presumptive taxes, privatised collection or inspection services, or performance-linked bonuses or administrative budgets. An exception to this was the support for independent revenue authorities’ (World Bank 2000: 3). The staff of the World Bank tend to deny that the organisation has ever urged the ARA model on developing countries, or made acceptance a condition of assistance. It is hard to establish the truth, but quite clear that, at the very least, the World Bank has on occasion been a persuasive salesman for ARAs. In Latin America and the Caribbean, revenue authorities have been established in Jamaica (1981), Argentina (1988), Bolivia (1987, re-established in 2001), Peru (1988/ 1991), Colombia (1991), Venezuela (1993), Mexico (1997), Ecuador (1999), Guatemala (1999) and Guyana (2001). In Africa, the revenue authority model has been instituted in Ghana (1985), Uganda (1991), Zambia (1994), Kenya (1995), Malawi (1995), Tanzania (1996), South Africa (1997), Rwanda (1998), Zimbabwe (2001), Ethiopia (2002), Sierra Leone (2002), Lesotho (2003), Gambia (2005) and Mauritius (2005). Burundi is planning a revenue authority and several West African countries may follow. Grindle (1997: 491) explains the degree to which managerial autonomy over personnel matters is crucial to organisational autonomy more broadly.
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recruitment of new staff from the private sector, the ministry of finance and the central bank, and (b) the merging of two or more agencies that previously had each dealt only with one category of taxes, e.g. customs, income tax, sales tax, etc. The diversity of ARAs is one reason why we cannot clearly say whether they are a good thing. A second reason is that most are still relatively new and evolving. A third is that, because they have been introduced in part at the urging of aid donors and international financial institutions, and sometimes justified in rather doctrinaire terms, impressionistic interpretations of the evidence for or against them may be somewhat tainted. One can understand why autonomous agencies were introduced. In environments characterised by large-scale corruption and politicisation of the taxation process, radical institutional reform is very appealing. However, we do not know how far this was the right kind of reform. We do know that it has raised problems of its own. To understand why, it is helpful to step back from the immediate policy debate and, building on the ideas put forward by Julia Strauss in Chapter 9, think about the taxation function from the perspective of organisation theory. Strauss argues that the core functions of a tax administration – the assessment and collection of tax dues – almost require, for both positive and negative reasons, a stereotypical Weberian bureaucracy characterised by hierarchy, close oversight of work performance by superiors, adherence to clear formal procedures, work discipline, long-term career orientation, and meritocratic recruitment and promotion. The positive reason is that the core tasks – assessing and collecting taxes – are highly measurable, quantifiable and divisible, and so are very amenable to a strongly programmed and hierarchic pattern of work organisation. The negative reason is that the ever-present threat of corruption and extortion in the relationship between tax collector and taxpayer places a high premium on organisations which, through combinations of internal vigilance, strong discipline and the establishment of a powerful organisational culture, are able to minimise the incidence of these damaging behaviours. It is undoubtedly the case that well-managed Weberian organisations, administered separately from the rest of the public service and enjoying substantial independence to establish their own organisational routines, have sometimes been very effective tax gatherers. The Sino-Foreign Salt Inspectorate about which Strauss writes is one historical example. An even older one is the British eighteenth-century Department of Excise. Organised on similar Weberian lines, with strong elements of internal discipline, oversight, meritocratic recruitment and promotion, this may be the earliest modern tax bureaucracy on which we have detailed records (Brewer 1989: 101–14).
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If these historical British and Chinese tax administrations were doing a job very similar to that required of a modern tax authority, then one could see even more strongly the appeal of the ideas behind the ARA model: a radical shift to a new organisation independent of other agencies – and therefore independent of politics – that would be able both to create a strong organisational culture and to operate in Weberian mode. The problem is that the job of a modern national tax administration is not quite that simple, in two important respects. First, even the most reformed modern tax systems are more complex than the simple salt production tax (China) or the single excise tax (eighteenth-century Britain). Contemporary tax administrations are required to administer several taxes simultaneously. More important, they spend much of their time dealing with relatively large corporate clients who operate on the basis of complex accounting systems and do business with other similarly complex enterprises, often at arm’s length or in other countries with different currencies, laws and accounting systems. The tax relationships of many contemporary enterprises are not simply between an owner or manager and the taxman. Lawyers, accountants, tax consultants and other (overseas) branches, subsidiaries or affiliates of a complex corporate organisation may also be involved. The exercise of some discretion in interpreting accounts is inevitable. The formal tax rules do not determine final assessments, but rather establish the context in which those assessments are bargained. Many tax liabilities today are not as clearly definable and measurable as in the case of the Chinese salt tax. The second difference follows closely. As we explained in the introduction to this chapter, tax reform is typically a continual and mainly technical process. Rules and procedures are being amended steadily. To the extent that changes need to be embodied in law or in budgetary policy, the government agencies responsible require a great deal of detailed information and feedback on the tax collection process. That feedback inevitably has to come from the tax collection agency. The task of tax collection cannot in practice be entirely divorced from the tasks of making tax and budgetary policy. These tasks can be accomplished by different organisations, but they need to cooperate with one another. Two potential problems with the creation of ARAs are signalled in the two previous paragraphs. First, because contemporary tax collection always involves some exercise of discretion, the creation of a powerful, autonomous ARA not subject to adequate external constraints could expose the taxpayer to extortion. The tax relationship will work well only if the taxpayer has some kind of protection against extortion, notably substantive taxpayers’ rights. Second, if the autonomy of the ARA from
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the ministry of finance is established in conditions that create ill-feeling between the two, or provide few incentives for cooperation, then tax and budgetary policy may be compromised. A third problem is embedded in the application of the concept of autonomy to an organisation that handles large sums of money. Managerial autonomy – to run a tax agency on a day-to-day basis in ways that make sense from a perspective of its special functions – seems very sensible. The problems lie at the level of political control. The top managers of a tax agency cannot be left free to dispose of its income as they wish. They should be responsible to someone or, preferably, to some institution. The problem with ARAs in some developing countries is that the label ‘autonomy’ has in practice disguised the fact that they have been answerable to only one person, often the president. There is no typical ARA story to tell.22 We can illustrate the points made above from the experience of the first contemporary ARA to be established: Peru’s National Superintendency of Tax Administration (SUNAT).23 SUNAT was established in 1991 under President Fujimori, at a time when political crisis, widespread insurgency and a period of hyperinflation had reduced the government’s tax take to around 4–6 per cent of GDP,24 a critically low figure. Fujimori had recently been elected, from outside the established party system, on the strength of his promises that, as a successful business man who would brook no nonsense, he would turn Peru around. Fujimori mandated the first Superintendent of SUNAT to take the revenue collection function out of the hands of the Ministry of Finance, and do what was needed to re-establish an effective tax agency. Many of the existing tax collectors were dismissed. New staff were recruited, mainly from the Central Bank and the private sector. To attract good people and diminish the temptation to be corrupt, they were paid well above the old rates for Ministry of Finance staff. SUNAT quickly established a reputation for honesty and efficiency, and for willingness to use high-profile methods to squeeze tax dues even out of business people who could claim political influence. The Superintendent reported directly to the President. For a while, SUNAT was lauded as a great success. Its experience undoubtedly strengthened the view of some people in international financial institutions that they had an institutional innovation that worked. Although none of the international financial 22
23 24
For some case studies, see Chand and Moene (1999); Devas, Delay and Hubbard (2001); Fjeldstad (2003, 2006); Taliercio (2003, 2004); Terkper (1999); Therkildsen (2004a); Zuleta, Leyton and Ivanovic (2006). For more detail on the SUNAT experience, see Durand (2002); Estela (2000); Mostajo (2004). The figures vary a little, as one might expect in a period of hyperinflation.
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institutions ever committed themselves publicly to the policy of establishing ARAs, developing countries were strongly advised to think along these lines. What happened to SUNAT? Several things led to considerable disillusion within a few years. There was resistance from the business sector to SUNAT’s high-profile tax collection techniques. While the organisation continued to be used against specific political opponents of the President, and as a general threat against potential opponents, Fujimori seems to have withdrawn support both from the policy of pressuring business to pay its dues and from the Superintendent personally. The Ministry of Finance attempted to re-establish control over tax raising. There were open conflicts and changes of staff. One Superintendent fled the country and was later arrested abroad and charged with corruption. And SUNAT’s performance in raising revenues, which had been so impressive for the first few years, plateaued at a level that was clearly too low from a developmental perspective. Critics of ARAs have cited these later experiences of SUNAT as evidence of flaws in the basic model. It is, however, too early to tell. The Uganda Revenue Authority was similarly very successful in its early years, but then its performance as a revenue raiser plateaued. Some observers see a link with the fact that it has in practice been directly responsible to President Museveni (Therkildsen 2004a). Similarly, before the democratic revolution of 2004, the revenue authority in Ukraine, which was directly under the control of the President, refused to give any information to the legislature, effectively excluding it from the process of making tax policy. By contrast, the South African Revenue Service, which has an impressive record of tightening up tax collection and appreciably increasing the total tax take, has tended to work closely with other relevant agencies, including the Treasury (Moore and Schneider 2004). It is run by one of the leading figures within the ruling African National Congress. In Tanzania, revenue targets are set on the basis of negotiations between the Tanzania Revenue Authority (TRA) and the Ministry of Finance. Once the total tax revenue budget has been agreed, the Research, Policy and Planning Department of the TRA sets collection targets for the TRA’s revenue departments (Fjeldstad, Kolstad and Lange 2003). While this arrangement helps exclude politicians from delicate decisions, the involvement of a tax administration in setting its own performance targets also implies moral hazard. ARAs and ministries of finance need to cooperate, but cooperation also raises problems. It is possible that, a few years into the future, the policy of promoting ARAs in poor countries might be viewed as positive. It has the great merit of facilitating the degree of managerial autonomy that many tax
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administrations need.25 At this point we can conclude that the ways in which ARAs have been introduced and promoted have led to problems which should have been foreseen. Above all, fascination with the potential of a single new super-agency has distracted attention from the fact that, in tax raising as elsewhere in the public sector, good organisational performance often depends on the nature of the relationships among agencies. In particular: 1. Tax administrations need to cooperate with the ministry of finance, especially over tax and budgetary policy. If an ARA is established in ways that stimulate rivalry and jealousy with the ministry of finance, cooperation might be severely jeopardised.26 2. If ARAs are not to be abused by powerful presidents, and used as a private source of income or an instrument to intimidate political opponents, then their high status and managerial autonomy needs to be offset by pluralistic governance arrangements. Political autonomy, in the positive sense of the term, is likely to be maximised to the extent that: (a) an ARA has a guaranteed budget that cannot be changed by the government in power; (b) its status, responsibilities and powers are enshrined in law and can be protected through the police and the courts; (c) appointments to the supervisory board are made by a variety of public agents (e.g. different ministries) and non-state agents (e.g. business or lawyers associations); (d) appointments to the supervisory board are of long-term and fixed duration; and (e) managerial and operational staff are answerable only to the supervisory board.27 3. As organisation theorists have long argued, and Julia Strauss discusses in Chapter 9 in this volume, in the public service sustainable organisational autonomy cannot be granted but has to be continually earned. It is always under threat. The organisation has continually to demonstrate the value of its autonomy to those who could terminate it. Let us finally note that the assumptions about organisational behaviour used to justify the establishment of ARAs are often very contestable. For example, it is often argued that ARAs should be financed either through constitutional mandates or through automatic entitlement to a proportion of their own receipts, so that they will not be beholden for their daily 25
26
27
Not least because they are often competing for staff with private lawyers and tax advisers. If the tax authority is unable to provide levels of remuneration and job satisfaction to attract high-quality staff to its own side, it can easily find itself outwitted by the other side. Therkildsen (2004a) suggests that the Uganda Revenue Authority became a target for rivalry, jealousy and political interference, especially over personnel matters, because it offered well-paid jobs and considerable rent-seeking opportunities. We are very grateful to Rob Taliercio for discussion and access to some of his unpublished work on this subject. See also Taliercio (2003, 2004).
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bread to politicians sitting in the Cabinet or the legislature. By contrast, we have been impressed by senior Nigerian tax administrators arguing forcefully that their agencies can only get the political support they need to do a better job if they are obliged to explain annually to Parliament what they are doing and why their operational budget requests should be approved. 10.3.4 Encouraging constructive state–society engagement around taxes Imagine that tax reformers were convinced of the validity of the arguments advanced in this book and wanted to encourage constructive engagement between governments and citizens over taxation issues. What would they then do? The details would depend on the specific context, but they would in general try to do two things, simultaneously. First, they would want to engage the attentions and political energies of a substantial fraction of their citizens in taxation issues by raising taxes from them. The felt experience of paying taxes should not be confined to small numbers of companies and very rich people. It should be shared sufficiently widely to secure the prominence of taxation issues on the public political agenda. Second, the tax reformers would want to levy those taxes as consensually and as transparently as possible. They would want to put an end to arbitrary assessments, forcible collections and the corrupt use of the tax collectors’ power to extort money from citizens and companies, and increase the extent to which taxation becomes a predictable, negotiated process, in which the taxpayer has the right and the power to appeal to law against unjust treatment. These two objectives are not always fully consistent with one another. There is always some element of compulsion in tax collection. The two authors of this chapter have slightly differing instincts about the right kind of trade-off to be made between, on the one hand, minimising compulsion and the attendant risk of coercion and extortion and, on the other, ensuring that public revenue needs are met and hoping that even somewhat abrasive experiences with the tax collector will help mobilise taxpayers politically in a constructive fashion. Our concern here is not how to balance these differing positions in specific cases, but whether and how the global tax reform agenda has contributed to either of these two goals: mobilising citizens by taxing them; and moving from coercive towards consensual, transparent revenue raising. The main promoters of the global tax reform agenda are unlikely to think in these kinds of political terms. As we explained in the first section of this chapter, the reforms have been framed and driven by the ideas and discourse of various technical specialists. But they nevertheless have
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political impacts. We do not know in detail what they are but can sketch out a few of the main apparent trends: 1. The simplification of tax systems that were often highly complex, and in practice often quite discretionary, is likely to encourage the political mobilisation of taxpayers on taxation issues because the tax system becomes more transparent and accessible to ordinary citizens, and the temptations to pursue the individualistic route of cutting (corrupt) deals with the taxman are somewhat reduced (Moore 2004b). For instance, in Tanzania, the tax grievances of large corporate taxpayers are increasingly being channelled to the legal system, sometimes through collective organisations such as trade associations. Government and business are increasingly engaged in a constructive dialogue and increasingly willing to reach compromises with one another. This is significant in a country where the private sector was completely shunned by government until recently, and bribery and private deals played a major role in shaping tax assessments. 2. One component of the drive to simplify tax systems and to improve tax administration, justified in terms of reducing both the administrative costs of collection incurred by the tax administration and the compliance costs incurred by taxpayers, has been the removal from the tax net of those taxpayers who generate little net revenue. This is contrary to the emphasis in principle within the global tax reform programme on broadening the tax net. We have no overall figures on changes in the global number of taxpayers. However, it seems likely that there has been no big increase, and that, in many countries, the number of registered taxpayers has been reduced. We are not suggesting that a wider tax net is always a good thing. Our concern is that tax reform has been driven by a clear economic calculus that emphasises the advantages of excluding marginal payers from the tax net. The political arguments for inclusion have not been made or heard. This would be less of a problem if the actual tax burdens in poor countries were fairly and effectively distributed. But they are not. In particular, they often fall heavily on a small number of registered, formal sector companies. In Tanzania, with a total population of more than 35 million people, 286 large taxpayers pay almost 70 per cent of the domestic taxes.28 The revenue base excludes many professionals, such as lawyers, doctors and private consultants, as well as the more stereotypical, poor informal sector enterprises. Fewer than 1 per cent of the taxpayers pay 28
The data, relating to June 2005, were kindly supplied by the Tanzania Revenue Authority.
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more than 85 per cent of the direct taxes levied in Peru (Mostajo 2004). We know from a wide variety of sources that this heavy concentration on a few larger taxpayers can have perverse results.29 Tax collectors, both institutionally and personally, have stronger incentives to concentrate on trying to extract more revenue from this existing, registered base than to go about broadening the base by bringing additional smaller enterprises and individuals into the net. Identifying, locating and registering new taxpayers can be difficult. And concentrating on the existing base can be more rewarding: larger taxpayers are more likely to be willing to pay larger bribes. Those processes in turn help to keep issues of taxation and extortion off the public political agenda: smaller enterprises may be little affected by tax at all, and larger enterprises may continue to solve their problems through bribery.30 We are not suggesting that this simple causal model tells anything like the full story. The point is that it is sufficiently valid that it makes sense to question the dominance of economistic arguments for excluding smaller taxpayers from the tax net on pure efficiency grounds, and to explore the potential political advantages of widening that net. 3. The argument made in the previous paragraph is all the more pointed in situations where national governments are under strong pressure from the IMF to meet revenue targets, and their tax administrations respond with some combination of (a) an even tighter squeeze on registered taxpayers, and (b) quasi-military ‘raids’ on other businesses on which they do not have detailed information. In Uganda, operations against smuggling and tax evasion have been staffed by military personnel. Gariyo and Anena (2001) talk of the militarisation of the revenue collection. Therkildsen (2004a) argues that, by pushing for unrealistically high revenue targets, the Ministry of Finance helped undermine the reputation and credibility of the Uganda Revenue Authority in the eyes of the public. Attempts to meet externally set tax-to-GDP targets may undermine democratic accountability if legal processes and taxpayers’ rights are set aside in response (Luoga 2002). Clearly any blame for such behaviour should be widely shared, and does not lie solely with the IMF. Our point, again, is that a purely
29
30
In his comparative study of Argentina and Chile, Bergman demonstrates the long-term damage to collection capacity that resulted from repeated ‘emergency’ revenue-raising campaigns in Argentina (2003: 623). See also Gloppen and Rakner (2002). In private communications, Amrita Jairaj has pointed out to us, on the basis of her research in India, that tax consultants often ease the moral burden of being bribe-givers by themselves paying the bribe and cloaking it within their fee charges.
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economistic approach to tax policy may have perverse results, for both polity and economy. 4. Finally, and most starkly, the global tax reform agenda has so far been heavily focused on central governments and central revenue raising, notably through autonomous revenue agencies. The highly coercive revenue raising practised by some local administrations, notably in parts of Africa (Chapter 4) and China (Chapter 3), has not been on the radar of the reformers. Ending that coercion implies more attention to local government finance. If the global tax reform programme were judged by the degree of attention it has given to trying to reduce the most coercive types of taxation, it would not score highly. For the structural reasons explained in Chapter 2, taxation tends to be more coercive in poorer societies. In some respects, the global tax reform agenda seems to encourage more constructive state–society engagement around tax issues. In other respects, it seems to do the opposite. We should be concerned. 10.4
Conclusion
National tax policy has become significantly more globalised in recent decades. There is no single driver of this trend. The spread of digital technologies has been important worldwide. When looking at the poorer countries, it is generally easy to spot the influence of the IMF and other international financial institutions. But their power and influence is generally on the wane. From a long-term perspective, a more important factor may be the emergence of an epistemic community of taxation professionals, employed in national tax administrations, in consultancy companies and in international financial institutions, and organised in regional and global professional associations. That epistemic community both shaped and was shaped by a period of unusually radical tax reform in the developing world since the 1980s. A professional consensus was established around a small number of powerful ideas and institutional technologies – notably the Value Added Tax, the notion of a greatly simplified tax system, and a commitment to reform tax administration. Although taxation is conventionally viewed as a highly contentious political process, this professional consensus has made possible a great deal of tax reform that, with some exceptions, has generated little overt resistance. As we indicate at the beginning of this chapter, the tax reformers’ work appears unending. The need for reform seems to be as great today as in 1980. But there has been considerable progress in the interim. Has this global tax reform been good for state-building? It is hard to give an unambiguous answer. As we have pointed out in this chapter, the
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reforms have not been anti-state in intention. The main single locus of reform, the IMF, has an institutional interest in helping governments to tax more effectively and efficiently. Many central tax administrations are more professional and effective today than twenty years ago. The effects of reforms have been sufficiently visible that there is no significant pressure to privatise tax collection. From a state-building as much as from an economic policy perspective, the main emphases within the global tax reform agenda – exploiting the potential of VAT, simplification of systems and improving administration – seem broadly right. The concerns that we have voiced here about the implications of the global reform agenda for state-building in poor countries arise from the fact that the agenda has largely been shaped by people and institutions focused on the situation and needs of richer countries and concerned mainly with the economic rather than the state-building dimensions of taxation. Poorer countries, which are more diverse than the richer nations, have been marginalised in the reform design. Opportunities to devise policies specific to their needs have been missed. We dealt with the following issues: The way in which the governments of many poor countries lost revenue because of the rapid reduction in trade taxes when the putative substitute, VAT, was not yet sufficiently bedded down in the difficult environment posed by the prevalence of informal, unrecorded economic transactions. The low levels of interest in finding ways of actually taxing the informal sector, exploiting the potential for effective urban property taxes, or tackling the scandal of tax exemptions for aid agencies. The promotion of authoritative, privileged, autonomous revenue agencies as one-shot, stand-alone solutions to problems of tax administration, when experience in other sectors and basic organisational analysis point to the need to pay attention to the relationships between these agencies and other fiscal institutions. The general lack of concern for the historical evidence about the connection between taxation and state-building, notably the need to construct taxation systems that engage citizens in politics in a positive way, and contribute to the legitimacy of the state. The last point is perhaps the most important. The global tax reform agenda has been effective in part at least because its proponents have been consciously anti-political. They have been able to achieve reforms partly because they have succeeded in presenting them as technical and the inevitable result of globalisation and of the need to be efficient and competitive in the global economy. They have not generally wished to engage citizens over taxation issues and have certainly tried to exclude most politicians. These are all understandable strategies. They have to
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date produced some successes and bear responsibility for no disasters. However, we do not think the world should be fully satisfied with that. Tax reform inevitably has political consequences. Reformers who skate over the state-building problem in pursuit of a purely technical agenda are likely to miss opportunities. They are unlikely to contribute to the construction of effective and accountable states, and might even on occasion be undermining that goal.
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Index
accountability, 8–9, 29–30, 102, 184, 188, 208–9 Africa, 6, 23, 60, 150, 157, 159 coercive taxation, 36, 43, 125–8, 131–4, 258 colonial systems, 21, 115, 117, 137 incentives to build tax capacity, 16, 17 poll tax, 27, 32, 114, 115–25 tax regimes, 236, 249n.20 agrarian societies, 41–3, 44, 114, 242–3 agricultural tax, 92, 97, 111, 113, 135–6, 137, 159 agriculture, 92, 99, 144–5, 165, 171 aid see foreign aid Anena, C., 257 Angola, 189 Araujo-Bonjean, C., 187 arbitrariness, 37, 40 Argentina, 28, 152, 63n.43, 248n.18, 249n.20, 257n.29 associational taxation, 31, 32–3, 184–5, 191–4, 209–11 case studies, 194–209 associationalism, 205–6, 210 Australia, 150 autonomous revenue authorities (ARAs), 219, 224, 237, 239, 249–55, 259 autonomy, 249–50, 251, 253–4 Ayee, Joseph, 25, 30, 31, 32, 244–5
bonds, 8–9, 149–53 Botswana, 28 Bra¨utigam, Deborah, 14, 23, 32, 33, 36 Brazil, 22, 26, 152, 236 Brewer, John, 8 bribes, 128, 257n.30 Britain, 8, 115, 143–4, 209–10, 250–1, 48n.24 civil service, 7–9, 17 property taxes, 27, 246 revenue bargaining, 26, 36, 45–9, 51, 56, 63, 50n.26 see also colonial influence Brown, J. R., 176 bureaucracy, 7–9, 54–6, 98, 115, 133–4 autonomous revenue authorities (ARAs), 250–1 and capacity, 146–7, 212–17 China, 95–8, 105–7, 108, 110, 112, 219–20 informal sector tax collection, 189–90, 210–11 insulation, 221, 223–31 political influence, 231–4 and taxation, 15, 48 Burns, J. P., 112 business, 30–1, 138–9, 167–81, 188–91, 197–9 business tax see corporation tax
Balcerowicz, Leszek, 68, 81 bargaining see revenue bargaining Bates, Robert, 13, 135, 137, 157, 159 Baunsgaard, T., 243 Bergman, Marcelo, 28, 248n.18, 257n.29 Bernstein, Thomas P., 24, 29, 32, 43 Best, Michael, 25–6, 55 Bhavnani, R., 18 Bianco, Lucien, 91 Bird, Richard, 203, 246 Boix, C., 10, 11 Bolivia, 26, 186, 189, 241n.10, 249n.20 natural resources, 160, 166, 168, 164n.3
Cameroon, 189, 216 Canada, 150 capacity, 137–8, 189–90, 233, 251 developing countries, 11, 16–19, 54–6, 214–17, 247–55 Mauritius, 18, 21, 143, 146–7 organisational strength of the taxed sector, 74–80, 157 post-communist states, 26–7, 66, 69, 72, 74–80, 84, 85–8 and tax reform, 237, 247–55, 258, 259 and taxation, 2–4, 15–24, 132, 146–7, 216–17
287
288
Index
Cape, 150, 152 capital, 51, 57–9, 140, 164 Cariola, C., 167, 171 cartels, 165, 171–3, 174–6, 179, 164n.2 Catterson, J., 133 Centeno, Miguel, 16, 17, 25, 53, 158 Central America, 25–6 central planning systems, 43, 59 Ceylon, 150, 152 Chambas, G., 187 Chamberlain, Joseph, 151, 150n.10 Charlton, R., 128 Chaudhry, Kiren Aziz, 19 Cheibub, J. A., 10, 11, 57, 193n.12 Chen Daolong, 101 Chile, 14, 152, 164n.3, 257n.29 balance of power (1895–1915), 174–7 bargaining, 32, 38, 181–2 capacity, 18, 28, 248n.18 collective action problems, 31, 138 exports, 166, 167, 169, 176–8 Nitrate Era (1880–1930), 14, 161, 165–8 price instability, 18–19, 27, 164–6, 171, 174, 176–8, 181–2 state-dominated taxation (1915–1930), 177–81 China, 215, 218, 219–21, 50n.26 capacity, 17, 33 coercive taxation, 29, 32, 36, 43, 258 institutional set-up of Salt Inspectorate, 223–31 rural taxation, 89–94, 98–102 Sino-Foreign Salt Inspectorate, 23, 217–23, 231–4 tax burden, 94–8, 99 tax resistance, 29, 30, 102–13 chop bars, 197, 208 civil service, 7–9, 15, 17, 48, 54–6, 219–20, 224–30 see also bureaucracy class (social), 26 coercive taxation, 24, 35, 37, 115 Africa, 29–30, 36, 125–8, 131–4, 258 determinants, 32, 40–4, 62 foreign aid, 29–30, 115, 133–4 Russia, 27, 77, 83–5, 87–8 in tax collection, 46, 100–1, 129, 214 collective action, 138–9, 143–6, 153–5, 181–2, 200–1, 202 associations, 31, 192 capacity for, 50, 157 cartels, 165, 171–3, 174–6, 179, 164n.2 informal sector, 191 see also protest Colombia, 30–1, 138, 249n.20
colonial debt, 149–50 colonial influence, 20–2, 129 Africa, 21, 115, 117, 137 of Britain, 21–2, 115, 117, 149–50 Chile, 167, 170, 171–2, 174–5 China, 219–20 India, 219, 220, 42n.13 Mauritius, 139–42, 143–4, 146, 147, 148–9, 152–3 Sino-Foreign Salt Inspectorate, 219–20, 232 Tanzania, 119 Uganda, 121, 123, 127–8 ‘commitment problem’, 47n.20 consent, 3, 12, 74–80, 206 Britain, 45, 209 China, 91, 93, 100 contingent consent, 75, 76–7, 87, 45n.17 European states, 22, 31 constitutional change, 22, 73, 148 contractual taxation, 37, 38–9, 44–9 Corporate Income Tax (CIT), Poland, 69, 79, 81–2 corporation tax, 69, 79, 81–2, 84 Russia, 72, 74, 79, 85, 86–7 corruption, 41–2, 190 critical junctures, 11, 16, 19–22 Cukierman, A., 57 culture, 4, 6–7, 14, 229–30 Dane, Richard, 219, 224–6 Daunton, M., 209–10 De Soto, Hernando, 199 decentralisation, 29–30, 94–6, 124, 132 democracy, 39, 193, 206 and coercive taxation, 44, 115, 133, 134 and revenue bargaining, 48, 57, 109–10, 128–31 developing countries, 52–4, 186, 242–4 capacity, 11, 16–19, 54–6, 214–17, 247–55 coercive taxation, 40, 41–2 differences from advanced capitalist countries, 14–15 and revenue bargaining, 52–62 revenue sources, 34, 59–62, 244–7 state-society relations, 255–8 tax reform, 23, 237–8, 258–60 development, 123, 137–8 ‘devil’s deal’, 191, 203 Dickovick, J. T., 200 direct taxation, 156, 178, 185–8, 189 see also corporation tax; income tax dirigiste state, 153–5 Doner, R. F., 53
Index donor funding see foreign aid Durand, Francisco, 30–1 ‘earned aid’, 156 East Africa see Africa Easter, Gerald, 22, 25, 26, 31, 32, 33, 36, 37, 65 economic development, 4, 5–6, 14, 57–9, 94–6 economic rents, 18–19, 34, 43, 59–63, 158 economic structure, 4, 5–6, 40–2 education, 96, 97, 111, 112, 123 Edwards, S., 57 Egypt, 152, 216 elected officials, 115, 166 elections, 109–10, 130–1, 133, 148–53, 206 elite bargaining, 73–4, 79, 83, 86–7 elites, 25–6, 44, 146–7, 169–70, 164n.3 embeddedness, 30–1, 138–9 England see Britain equality, 27, 76, 99–100, 116 Europe, 22, 36 European Union (EU), 67, 82, 155, 159 Evans, P., 30 excise tax, 72, 82 exemptions, 78–9, 81 export taxes, 146–7, 155–6, 242–3 agricultural export taxes, 135–6, 137, 159 Chile, 169–71, 179–80 and collective action problems, 143–6, 153–5 conventional view of, 135, 136–9, 159 Mauritius, 27, 137, 141–2, 143–56, 156–8 and value added tax (VAT), 135, 158, 236 external shocks, 164, 177–8, 182 extortion, 41–2, 132, 251 extractive capacity see capacity fairness, 6–7, 76–7, 102, 116 Fauvelle-Aymar, C., 11, 57 fines, 97, 98, 99 fiscal contract, 5, 12–14, 27–8 fiscal crisis, 68–72, 80, 193, 195, 199, 202, 203–5 fiscal policy, 68–74 fiscal state, 47, 143, 148–53 Fjeldstad, Odd-Helge, 20, 21, 23, 24, 27, 28, 29, 32, 33, 43, 126 ‘flat taxes’, 237n.4 force, use of, 100–1, 125–7 foreign aid, 23–4, 118–19, 143, 155–6 and coercive taxation, 29–30, 115, 133–4 effect on revenue-raising efforts, 243n.13
289 strategic rents from, 34, 61–2, 63 tax exemptions, 246–7, 259 France, 8, 139, 140, 220, 236, 56n.32 Franzsen, R. C. D., 246n.15 Friedman, S., 28 Gallo, Carmenza, 14, 18, 26, 32, 33, 138 Gariyo, Z., 257 Gemmell, N., 244 Germany, 119, 167 Gerring, J., 11 Ghana, 157, 184–5, 190, 150n.11, 249n.20 associational taxation, 31, 32–3, 192–3, 194–7, 201–9 presumptive taxation, 189, 209 value added tax (VAT), 189n.6, 241n.11 Gibson, C. C., 30 globalisation, 33, 57–9, 60–1, 238–42, 258–60 goals, 221, 223–31 Gould, A. C., 11 governance, 1–4, 34, 62–3, 158–9 and revenue bargaining, 36–7, 38–9, 63, 113, 162 state vs. local control, 94–6, 97–8 Great Britain see Britain Greece, 153 Guyer, Jane, 24, 134 hairdressers, 195, 207, 208 Herb, M., 48n.23, 51n.28 Herbst, Jeffrey, 16, 121 Hlophe, D., 28 Hobbes, Thomas, 7 Hoffman, B. D., 30 house taxes, 24, 119, 122, 141, 142 Hui, Victoria, 17 Hyden, G., 120 ideologies, 4, 6–7 import taxes, 142, 236, 242 imprisonment, 120, 125 incentives, 16–19, 74, 92–3, 190, 193–4 income tax, 198, 244 Poland, 69, 71, 74, 76, 77, 78–9, 81–2 vs. poll tax, 116, 119, 124 Russia, 72, 77–8, 84, 85 India, 42n.13, 50n.26, 56n.32, 241n.11, 246n.15, 257n.30 Indian Civil Service, 219, 220, 224, 229 Indian workers in Mauritius, 139, 140–1 public debt, 150, 152 indirect taxation, 94, 156, 178, 188–9, 232–3 see also excise tax; value added tax (VAT)
290
Index
Indonesia, 186, 61n.40 informal sector, 78, 191–4, 205–6 Ghana, taxation case study, 194–7, 202–3 Peru, taxation case study, 199–201, 202–3 Senegal, taxation case study, 197–9, 202–3 taxation of, 32, 183–91, 203–11, 244–5, 259 Innis, Harold, 137–8 instability of markets, 143–4, 159, 161, 171, 177, 178–9 prices, 18–19, 27, 164–6, 171, 174, 176–8, 181–2 of revenue sources, 163, 164–5 institutions, 137, 157, 234, 240–1 Chile, 168, 178–9, 180, 181, 182 political institutions, 5, 9–12, 14, 43–4 and revenue bargaining, 47, 50, 193–4, 198, 200, 206–7, 210 and state capacity, 216–17 and taxation, 5, 9–12, 14, 33 insulation, strategies of, 221, 223–31 insurance, 153, 154 interaction, channels of, 193–4, 198, 200, 202, 206–7, 210 International Monetary Fund (IMF), 23, 137, 159, 183, 245–6 global tax reform driver, 59, 197, 238–9, 257, 259 Ivanova, A., 85 Jairaj, Amrita, 257n.30 Jamaica (West Indies), 150, 249n.20 Japan, 20–1, 216, 221, 223 Joshi, Anuradha, 25, 30, 31, 32, 244–5 Kaldor, Nicholas, 15 Karl, Terry, 19 Keen, M., 85, 243 Khan, A. R., 99 Kjaer, Mette, 22, 28 Klemm, A., 85 Knack, S., 23 Kohli, Atul, 3 Korea, 20–1, 27, 153, 216 labour, 71–2, 97, 119, 178 land, 140–1, 148, 215, 217–18 Latin America, 16–17, 20, 25, 28, 55, 187 tax collection, 239n.6, 249n.20 tax reform, 23, 26, 237, 238, 240, 241, 236n.2 law, 88, 108, 124 legitimacy, 7, 101–2, 109–10, 187
Levi, Margaret, 1, 6–7, 12–13, 14, 15, 27, 48, 160 levies, 215–16 Li Mingfeng, 216 liberalism, 39, 48 Lieberman, E. S., 22, 26 Lien, Da-Hsiang D., 13, 157 Lindahl, C., 133 Livingstone, I., 128 local government, 90, 122, 131–4, 173, 245–6 China, 95–6, 97–8, 105–7, 108, 109–10, 112 coercive taxation, 29, 43, 44, 258 funding, 124–5, 133–4 informal sector taxation, 199–201, 207–8 and national government, 94–6, 97–8, 118, 120, 130–1, 132 poll tax, 122 Russia, 73–4, 83–4, 86–7 Tanzania, 118, 119 local taxation, 96–102, 104 Lome´ Convention, 143, 155–6, 158, 159 Lu¨ Xiaobo, 24, 29, 32, 43 MacDonald, J., 51n.27 Mahon, James, 10, 23, 26, 39, 48, 59, 238, 239–40, 58n.34, 236n.2 Malawi, 186, 249n.20 Malaysia, 216 Mamdani, M., 127, 133 markets, 137, 143–4, 159, 161, 164, 177 Mauritius, 14, 139–42 capacity, 18, 21, 143, 146–7 collective action problems, 143–6 export taxes, 27, 137, 141–2, 143–59 revenue bargaining, 31, 32, 36 state-building, 143–58, 249n.20 McCluskey, W. J., 246n.15 Mexico, 189, 249n.20 Middle East, 60 migration, 42, 44 militarisation, 257, 45n.18 Millard, Thomas, 89 mineral resources see natural resources mobility, 51, 57–9, 157 as exit option, 118, 126 and revenue bargaining, 50, 162, 163, 164 Moore, Barrington, 3, 156, 162 Moore, Mick, 2, 10, 12, 14, 16, 17, 23, 24–5, 26, 29, 32, 33, 156, 158 moral obligation, 6–7 Moreno, C., 11 Morocco, 189
Index Morrissey, O., 244 Moss, T., 62 Mozambique, 137, 239n.6 Natal, 150, 152 national government, 34, 56–7, 207–8, 231–4 and regional government, 90, 94–8, 105–7, 118, 120, 130–1, 132 National Superintendency of Tax Administration (SUNAT), 249, 252–3 nationalisation, 172, 179–80 nationality of taxed groups, 164n.3 natural resources, 18–19, 39, 135, 138, 160–1, 179 dependency on, 14, 164–5, 166 mobility, 157, 162 rents from, 34, 43, 60–1, 63, 168 ‘resource curse’, 135, 138, 158 Russian taxation of, 27, 72–4, 80, 84, 85, 86–7 negotiation, 184, 193–4, 198, 200, 202, 206–7, 210 Netherlands, 36, 44, 45n.18 New Zealand, 150 Nigeria, 21–2, 44, 216, 255 Nitrate Era (1880–1930), 14, 161, 165–8 nitrates see Chile; Peru non-governmental organisations, 88, 118 non-payment of taxes, 124, 125–6 North, D. C., 20 O’Brien, T. F., Jr., 169 Oi, J. C., 92 oil, 39, 60–1, 161, 63n.43 Russian taxation of, 27, 80, 84, 85 Okigbo, P. N. C., 21 Olson, Mancur, 164n.2 optimal tax policy, 241 Organisation for Economic Cooperation and Development (OECD), 14, 34, 238, 246, 240n.8 organisations see institutions peasants, 115–16, 118 see also rural taxation in China permanency of governments, 49, 56–7 Perry, Elizabeth, 107 Personal Income Tax (PIT) Poland, 69, 71, 74, 76, 77, 78–9, 81–2 Russia, 72, 77–8, 84, 85 Peru, 249, 252–3, 257, 59n.35 associational taxation, 31, 32–3, 192–3, 194, 199–209
291 nitrates, 30, 166, 167, 168, 170 SUNAT (National Superintendancy of Tax Administration), 249, 253–3 Petterson, G., 62 Poland, 26–7, 31, 68–72, 74–83, 86, 87–8 political institutions, 5, 9–12, 14, 43–4 see also institutions political parties, 195–7, 206 political salience, 157–8 political stability, 56–7, 117–18 poll tax, 27, 32, 114–17, 62n.42 coercive taxation, 125–8, 131–4 rise and fall of, 117–25, 128–31 poorer countries, 40, 41–2, 52–62 see also developing countries post-communist states revenue bargaining, 68–74, 80–5, 86 state capacity, 66, 69, 72, 74–80, 84, 85–8 state-building, 64–8, 85–8 power, 26–7, 36, 64–8, 70, 92, 168 economic, 73–4, 83–4, 86–7 political salience, 157–8 and revenue bargaining, 162–5 preferential quota arrangements, 155–6 presumptive taxation, 189, 196–7, 208–10 prices, 94 instability, 18–19, 27, 164–6, 171, 174, 176–8, 181–2 profits tax, 72 ‘programmed’ decision making, 214n.2 progressive taxation, 153–5 property rights, 168, 170, 173, 176 property taxes, 27, 178, 215, 217–18, 245–6, 259 protest, 70, 74, 76, 86, 91, 105–7, 127–8 and coercive taxation, 24, 35, 40 value added tax (VAT), 241n.11 Prud’homme, Rene, 43 public debt, 149–50, 152, 51n.27 public scrutiny, 54, 108–9 racial factors, 26, 123–4 rebellion, 91, 105–7, 127–8, 241n.11 and coercive taxation, 24, 35, 40 post-communist states, 70, 74, 76, 86 redistributive taxes, 27 regimes, 56–7, 66 regional government, see local government regressive taxation, 14, 27, 55, 99–100, 217 regulation, 43, 44 Remick, E., 215n.4 Remmer, K. L., 23 rents, 18–19, 34, 43, 59–63, 158, 168
292
Index
representation, 26, 37, 40 and taxation, 10, 12, 13, 134, 148–53 ‘resource curse’, 135, 138, 158 revenue bargaining, 31, 95, 157, 161–5, 210, 256 definition, 37–8 and democracy, 48, 57, 109–10, 128–31 determinants, 5, 12–14, 26–8, 32, 49–62, 63 and governance, 36–7, 38–9, 63, 113, 162 in history, 44–9 and institutions, 47, 50, 193–4, 198, 200, 206–7, 210 during Nitrate Era (1880–1930), 168–82 as positive sum option, 35–7 post-communist states, 68–74, 79–85, 86–7 value added tax (VAT), 208, 244 see also negotiation revenue gap, 111, 113 revenue sources, 46, 50, 162–3, 186 developing countries, 34, 43, 59–62, 244–7 revenue stability, 164–5 richer countries, 40 riots as collective action, 105–7 Riskin, C., 99 Ritchie, B. K., 53 Roever, S., 208 Ross, Michael, 10, 39 Rosser, A., 18 ruler change, 56n.32 rulers’ incentives to build tax capacity, 16–19 rural taxation in China, 91–4 central government response to tax protests, 107–13 effects on the rural population, 98–102 structural causes of high tax burdens, 94–8 tax resistance, 102–7 Russia, 74–7, 50n.26 capacity, 26–7, 76–80, 87–8 revenue bargaining, 72–4, 79–80, 83–5, 86–7 state-building, 64–8, 85–8 salt tax see Sino-Foreign Salt Inspectorate Sanyal, B., 191n.9 Saudi Arabia, 19 Scott, J., 212–13 seigniorage, 57 (semi-)autonomous revenue authorities (ARAs), 219, 224, 237, 239, 249–55, 259
Senegal, 31, 32–3, 192–3, 194, 197–9, 201–9 shadow economy, 78 Shafer, Michael, 18, 138, 164 Sierra Leone, 18, 24, 249n.20 simplification of taxation, 236–7, 256, 258, 259 Singapore, 216, 60n.36 Sino-Foreign Salt Inspectorate, 23, 217–23 institutional set-up, 223–34, 250–1 Skocpol, Theda, 24 Slater, D., 53 small-scale producers see informal sector Smith, Adam, 134 Snyder, R., 18 social security, 71, 76, 84 social welfare benefits, 75, 76, 81, 96, 111, 153–4 societal compliance, 4, 6–7, 25–7, 74–80 Soto Ca´rdenas, A., 180 South Africa (Cape and Natal), 22, 26, 28, 150, 152 South African Revenue Service (SARS), 28, 248, 249, 253, 189n.7 Soviet Union, 22, 32, 92 Spain, 20 specificity, 230–1, 233 Sri Lanka (Ceylon), 138, 150, 152 state, 34–5, 45, 46, 54–6, 187, 206–7 and business, 30–1, 138–9, 167–81, 197–9 control of production, 92, 93–4 incentives to revenue bargaining, 49–52, 161–5 vs. local control, 94–6, 97–8 see also national government state capacity see capacity state-building, 64–8, 85–8, 143–59, 258–60 definition, 2, 31, 242 tax reform, contribution of, 242–58 and taxation, 1–4, 47, 48, 143, 216–17, 259–60 state-society relations, 24–31, 255–8 Steinmo, Sven, 3, 9, 11, 19–20 Storey, William, 145 strategic rents, 34, 61–2, 63 Strauss, Julia C., 15, 17, 22–3, 33, 250, 254 strikes see protest subsidies, 111, 112 sugar production see Mauritius Sunkel, O., 167, 171 Sweden, 9, 56n.32 Tabellini, G., 57 Taiwan, 27, 216, 226
Index Taliercio, R., 185, 252n.22, 254n.27 Tanzania, 30, 190, 253, 256, 63n.43, 124n.10, 247n.16 autonomous revenue authorities (ARAs), 248, 249n.20 coercive taxation, 29, 125–7, 131–4 political history, 117–19 poll tax, 32, 114–15, 117–21, 128–31 Tanzania Revenue Authority, 248, 253, 249n.20 Taras, R., 65 tax bargaining see revenue bargaining tax burden, 39, 40, 94–8, 176, 256–7, 59n.35 on rural community, 98–100, 107–13, 134, 244 tax collection, 64–8, 74–80, 116, 125–7, 142 agrarian societies, 41–2 associational taxation, 191–4 autonomous revenue authorities (ARAs), 249–52 coercion, 46, 100–1, 129, 214 informal sector, 188–91 number of taxpayers, 257 political culture, 229–30 private management, 23, 239 tax compliance, 37, 129, 131–4, 187, 214 Russia, 76–8, 87–8 societal consent, 4, 6–7, 25–7, 74–80 tax effort, 4, 6, 133, 134 tax farming, 5, 8, 21, 190, 210, 216 tax incentives, 69, 79, 95, 246–7, 259 tax morale, 4, 6–7 tax policy, 86–7, 132, 141, 235–42, 251–2, 253, 254 tax reform, 26, 66, 80–5, 95, 128–9, 235–8 autonomous revenue authorities (ARAs), 249–55 global drivers, 23, 238–42 and state-building, 242–9, 255–60 tax regimes, 68–74, 84, 96–8 tax resistance, 35, 102–7, 125–8, 129, 246, 241n.11 tax revenues, 141–2, 168, 195, 198, 202 influence on associational taxation, 193–4, 210 Sino-Foreign Salt Inspectorate, 221–3, 233–4 sources of revenue, 162–3, 244–7 value added tax (VAT) in developing countries, 242–4 tax take, 40, 57, 61, 187, 193, 242 taxation
293 complexity of, 43, 54–6, 251 origins of, 2 political economy, theories of, 4–14 potential, 202 under-taxation, 188–91 taxpayers, 45, 256–7 incentives to revenue bargaining, 49–52, 161–5, 256 political resources, 86, 161–5, 179, 181–2 technological change, 13, 41, 144, 247–8, 258 Tendler, J., 191 Thacker, S. C., 11 Thailand, 17 Therkildsen, Ole, 20, 21, 24, 27, 29, 32, 43, 257, 254n.26 Thies, Cameron G., 11, 16–17 Thomas, R. P., 20 Thorpe, Rosemary, 30–1 threat, 5, 7–9, 16–18, 158 and revenue bargaining, 45, 49–50, 52–4, 163 see also war Tilly, Charles, 7, 9, 16, 123 Timmons, J. F., 13–14, 38–9, 55 Tolbert, C. J., 11 township taxes, 97 Toye, John, 55n.31 trade liberalisation, 23, 236 trade taxes, 242–3, 259 see also export taxes; import taxes trade unions, 27, 71–2, 184–5, 195–7 transparency, 230–1, 233 transport, 194–5, 197, 218 trust, 4, 6–7 Turkey, 152, 220 Uganda, 28, 189, 241n.11, 242n.12 autonomous revenue authorities (ARAs), 249, 253, 254n.26 coercive taxation, 29–30, 127–8, 131–4 political history, 20, 22, 121–2 poll tax, 32, 114–15, 116, 122–5, 127–31, 62n.42 tax collection, 190, 257 Uganda Revenue Authority, 249, 253, 257, 254n.26 Ukraine, 137, 253 unilateral taxation, 161–5 United Kingdom (UK) see Britain United States (US), 9, 24, 135, 175, 236, 246 urban population, 107, 112 urban property, 245–6
294
Index
Uruguay, 189 user friendliness, 248–9 Uzbekistan, 216 value added tax (VAT), 208, 244, 241n.11 advantages of, 185–6, 188–9, 246 developing countries, 23, 242–4 and export taxes, 135, 158, 236 global reform, 23, 236, 258, 259 informal sector taxation, 183, 245 Poland, 69, 82 Russia, 72, 84 Senegal, 198, 202, 206, 209 values, and taxation, 4, 6–7, 14 van de Walle, N., 62 Venezuela, 28, 160, 249n.20 village taxes, 97 violence, 101, 102–7, 133, 187 Wallace, S., 203 war, 5, 7–9, 16–18, 123
and revenue bargaining, 36–7, 45, 49–50, 52–4, 163, 176, 177 see also threat War of the Pacific (1878–93), 166–7, 169, 170 Washington Consensus, 2, 241 Waterbury, John, 10 West Indies, 150, 151, 152, 153 willingness to pay, 6–7, 46 Wong, Christine, 111 World Bank, 137, 158, 197, 238, 249n.19 World Customs Organisation, 240 World Taxpayers Associations, 240n.9 World Trade Organisation (WTO), 135, 238 Yemen, 19 Zambia, 18, 30, 138, 249n.20 Zimbabwe, 249n.20
