Taxation and Democracy: is there a Bidirectional Causality?

  • Ofuan ILABOYA Professor of Accounting and Taxation
Keywords: Keywords: Democratisation, indirect taxation, reverse sequencing, Openness, Musgravian functions. JEL Classification: H20, O53, O11

Abstract

 

ABSTRACT

The study investigates the validity of the positive nexus between taxation and democracy in developing economy setting with an emphasis on Nigeria. This study is motivated by the counter-intuitive trend of the Nigerian tax to GDP ratio, which in current terms is not substantially different from the results of the Middle East economies where there is zero-tolerance for democratisation. This is a country-specific, longitudinal, time-series research strategy with data set from 1980 to 2017. The dichotomous nature of the dependent variable necessitates the use of logistic regression. The result of the analysis shows a mildly positive relationship between tax ratio to GDP and index of democratisation. The alternate variable of indirect tax is negatively related to democratisation, so do the control variables of population growth rate and openness. The control variable of corruption is positive and significant. We recommend a sweeping reform of the Nigeria Tax system, including re-engineering the mindset of the Nigerian tax administrators.

Keywords: Democratisation, indirect taxation, reverse sequencing, Openness, Musgravian functions.

JEL Classification: H20, O53, O11

References

REFERENCES

Acemoglu D. & Robinson, J. A. (2006). Economic origins of dictatorship and democracy.
Cambridge: Cambridge University Press.

Acemoglu, D., Naidu, S., Restrepo, P., & Robinson, J. A. (2014). Democracy does
cause growth (No. w20004). National Bureau of Economic Research.

Alesina, A. and Rodrik, D. (1994). Distributive politics and economic growth, The Quarterly Journal of
Economics, 109(2), 465-490.

Aidt, T.S. & Jensen, P. S. (2009). Tax structure, size of government, and the extension of
the voting franchise in Western Europe, 1860-1938’, International Tax and Public Finance, 16,362-94.

Bates, R.H. & Lien, D.D. (1985). A note on taxation, development, and representative government. Politics and Society. June DOI 10.1177/003232928501400102.

Boix, C. (2001). Democracy, development, and the public sector. American Journal of Po-
litical Science, 45, (1): 1-17.

Bourguignon, F & Leipziger, D. (2006). Aid, growth, and poverty reduction: Toward a new partnership model. New York: World Bank Group.

D’Arcy, M. (2012). Taxation, Democracy and State-Building: How does State –building matter? QoG Working Paper Series 2012:4 ISSN 1653-8919.

Farmer, P & Lyal, R (1994). EC Tax Law, Oxford EC Law Library Oxford European Community Law Series. Oxford: Oxford University Press.

Fauvelle-Aymar, C.(1999). The political and tax capacity of government in developing countries. KYKLOS, 52(3),391-413.

Fjeldstad, O & THerkildsen, O. (2008). Taxation, aid, and democracy: An agenda for research in African Countries. Chr. Michelsen Institute Working Paper. WP 2000:4.

Gunitsky, S. (2015). Lost in the gray zone: Competing measures of democracy in the former Soviet Republics. In Ranking the World: Grading states as a too for global governance, Cooley, A & Snyder, J. Cambridge: Cambridge University Press.

Keen, M. & Lockwood, B. (2009). The value-added tax: Its causes and consequences, Journal of
Development Economics, doi:10.1016/j.jdeveco.2009.01.012.

Khattry, B. & Rao, J. M. (2002) Fiscal faux pas?: An analysis of the revenue implications of trade
liberalisation, World Development, 30(8), 1431-1444.

Kenny, L. W. & Winer, S.L. (2006).Tax systems in the World: An empirical investigation
into the importance of tax bases, Administration costs, scale and political regime.
International Tax and Public Finance, 13, (2/3): 181-215.

Mansfield, E.D & Snyder, J. (2007). Turbulent transition: Why emerging democracies go in the 21st Century. In Crocker, C., Hampson, F.O., & Aall, P. (eds.), Leashing the Dogs of war: Conflict management in a divided World, Washington, D.C: United States Institute for Peace,

Meltzer, A. H., & Richard, S. F. (1981). A rational theory of the size ofgovernment. The Journal of Political Economy, 914-927.
Mutascu, M. (2011). Taxation and democracy. Journal of Economic Policy
Reform, 14(4), 343-348.

North, G. (1990). Institutions, institutional changes and economic performance. New York:Cambridge University Press.

Ross, M.L. (2004). Does Taxation Lead to Representation? B.J. POL. S, 34,229-249.

Profeta, P. & Scabrosetti, S. (2010). The political economy of taxation: Lessons from de-
veloping Countries, Cheltenham (UK): Edward Elgar Publishing.

Schumpeter, J. A. (1942) Capitalism, Socialism and Democracy, New York: Harper & Brothers.

Schulze, G.G. & Ursprung, H.W. (1999). Globalisation of the economy and the nation state. The World Economy, 22(3), 320-322.

Tonizzo, M. (2008). Political institution, size of government and redistribution: An empirical investigation. Development Destin Studies Institute Working Paper, No. 08-89

Uslander, E.M. (2010). Corruption, the inequality trap and trust in government. European Consortium for Political Research, Munster, Germany P1-36, Available online http//ecpr.eu/filestore/paperpriposal/df944ea6c-fb65-4a89-b5bb-74fb20a95ccc.pdf.

Yi, D.J. (2012). No taxation, no democracy? Taxation, income inequality and democracy. Journal of Economic Policy Reform, 15(2), 71-92.
Published
2021-04-29
Section
Business Administration and Business Economics