1. TAXATION LEADS TO POLITICAL REPRESENTATION
Taxation creates a kind of “social contract” in which citizens and government need to constantly negotiate, making leaders more accountable and representative (Moore, 2004). Conversely, lower or no taxation tend to decrease the demands of representation by the public (Huntington, 1991). Governments that need to tax citizens are more vulnerable as they need to constantly negotiate with the public (Stephan et al, 2014). As an example of that, the world’s most resilient absolute monarchies are in Persian Gulf partially because they do not tax their citizens income. Historically, the slogan “no taxation without [political] representation” was a major one in the British Thirteen Colonies during the 18th century, being of the factors contributing to the American Revolution. Many other former European colonies also revolted due to tax burdens without political representation. More recent evidence indicates that welfare programs in rich countries “is path-dependent upon the institutionalization of regressive taxes” (Kato, 2003). Others suggest that regressive taxation increases the provision of basic needs and progressive taxation strength property rights (Timmons, 2005). This makes sense since in regressive taxation system the poor (who are especially concerned with basic provisions) are the ones most taxed, while in progressive taxation upper classes (which are more worried about property rights) are more taxed. Different than general knowledge, the richest and most equal countries in the world, i.e. the Scandinavian states, have fairly regressive tax systems. Much more regressive than countries thought of taxing more the poor, such as the US (Steinmo, 1993). The difference is that public spending in Scandinavia goes more toward the lower classes, which coincidently or not are the ones being most taxed. If this argument is correct, middle classes should be the ones most beneficiated by government spending in emerging markets since the poor are mostly in informal jobs that do not pay tax and rich people evade tax. Evidence indicates that this is indeed the fact, e.g. Rudra (2008). Thus, it seems that there is strong correlation between taxation and public services. In order to receive public services, you must pay for it. Governments live out of tax revenues and they seem to only reward individuals paying for it. Differing from common sense, it seems that not taxing the poor increases inequality rather than decreases it. Not to mention the well established argument that regressive taxation can improve tax compliance and attract foreign capital. Several countries in Eastern Europe, for example, have observed the success of Estonian flat tax (i.e. a type of regressive taxation) in attracting foreign investors and fighting tax evasion, leading to a spread of regressive taxation systems in the region (Gray, 2009).
2. TAXING THE RICH IS OFTEN BEYOND ANY GOVERNMENT'S POWER
The very wealthy individuals around the world tend to evade around 25% of their taxes often by reallocating their assets to low tax jurisdictions (Alstadsæter et al, 2018a). Forcing tax havens to create taxation is very hard since most them have sovereignty to choose their own tax policies as any other autonomous territory. Moreover, studies indicate that even if you successfully force a tax haven to implement regulations, investors move their money to other tax havens and continue to evade taxes (Johannesen and Zucman, 2014). Consequently, all efforts to diminish tax evasion were in vain as government still cannot tax these individuals and now the tax havens left are even harder to convince to implement regulation since they are receiving even more investments. According to the best estimations, 10% of the global GDP and more than 50% of several countries economic output (like Russia, Saudi Arabia, and Venezuela) are in hidden in tax advantageous states (Alstadsæter et al, 2018b). These numbers do not even include foreign assets correctly declared, i.e. taxes legally avoided. Despite the fact that the vast majority of countries in world have progressive taxation systems, the richest individuals have been getting wealthier at a very fast pace. In fact, from all wealth produced from 1980 to 2016 in the world, the 1% richest people have taken twice as much of that growth than the world’s bottom 50% (Alvaredo et al, 2018).
Pedro Moraya Barros is the founder of Moraya Consulting. He is also a director and co-principal investigator of the Global Leadership Project (GLP), which is sponsored by the World Bank Group, and a PhD student at the University of Texas at Austin