This paper reviews the literature on taxation of the informal economy, taking stock of key debates and drawing attention to recent innovations. Conventionally, the debate on whether to tax has frequently focused on the limited revenue potential, high cost of collection, and potentially adverse impact on small firms. Recent arguments have increasingly emphasised the more indirect benefits of informal taxation in relation to economic growth, broader tax compliance, and governance. More research is needed, we argue, into the relevant costs and benefits for all, including quasi-voluntary compliance, political and administrative incentives for reform, and citizen-state bargaining over taxation.
SummaryIn many ways the raising of tax revenues is the most central activity of any state, but it is only recently that the development field has begun to take questions about taxation and its relationship to the performance of government seriously. This research seeks to investigate the particular hypothesis that a government that relies primarily on tax revenues, as opposed to natural resource rents or foreign aid, is more likely to be accountable to its citizens.This research seeks to capture the evolution of the Ghanaian central government tax system since 1982. The first goal is to understand the politics behind this evolution, in order to pinpoint the factors influencing the willingness and ability of governments to raise domestic revenue. The research then proceeds to ask whether the evolution of the tax system provides evidence that government efforts to raise taxes have given rise to successful demands for greater accountability.The research finds that there is significant evidence that taxation has often been a catalyst for demands for greater accountability, but also finds that the nature of this relationship has varied dramatically across time, context and tax types. While generalisations demand further research, initial evidence points to several factors that shape the nature of state-society bargaining over taxation, among them: the broader state of politics, the role of elites, the mobilising capacity of civil society, the motives for the tax increase and the type of tax in question.
It is increasingly argued that bargaining between citizens and governments over tax collection can provide a foundation for the development of responsive and accountable governance in developing countries. However, while intuitively attractive, surprisingly little research has captured the reality and complexity of this relationship in practice. This book provides the most complete treatment of the connections between taxation and accountability in developing countries, providing both new evidence and an invaluable starting point for future research. Drawing on cross-country econometric evidence and detailed case studies from Ghana, Kenya and Ethiopia, Wilson Prichard shows that reliance on taxation has, in fact, increased responsiveness and accountability by expanding the political power wielded by taxpayers. Critically, however, processes of tax bargaining have been highly varied, frequently long term and contextually contingent. Capturing this diversity provides novel insight into politics in developing countries and how tax reform can be designed to encourage broader governance gains.
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