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Taxation and accountability in sub-Saharan Africa: New Evidence for a Governance Dividend

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Presentation by Roel Dom at the 7th annual ICTD meeting in Kigali on February 5th 2019.

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Taxation and accountability in sub-Saharan Africa: New Evidence for a Governance Dividend

  1. 1. Taxation and Accountability in sub-Saharan Africa New Evidence for a Governance Dividend Roel Dom Institute of Development Studies February, 2019 Annual Centre Meeting International Centre for Tax and Development
  2. 2. Overview Puzzle Historical link between taxation and accountability in the West, but less clear for contemporary developing countries given different context. Theory Taxation as a bargaining process between rulers and citizens in which citizens trade compliance for influence in the decision-making process. Question Do increases in the tax ratio translate into increases in accountability scores for African countries? Strategy (Dynamic) FE and IV estimation Result Evidence for a small but positive impact of taxation on accountability. 1
  3. 3. Table of contents 1. Overview 2. Motivation 3. Literature 4. Data & Methodology 5. Results 6. Magnitude of the effect 7. Conclusion 2
  4. 4. Puzzle Historically, the link between tax and accountability is well-established: • England (1688), Parliament versus the Crown • France (1789), Louis XV convenes the Estates General • US (1776), “no taxation without representation” Today, this governance dividend argument features heavily in the policy discourse of international development actors. However ... ... questions about validity for developing countries nowadays ... “evidence was never abundant” 3
  5. 5. Theory Accountability: institutionalised system through which rulers justify their actions to citizens, and through which citizens can reward or punish rulers (Schedler, 1999). Tax bargaining: • rulers need revenue (Tilly, 1992) • citizens control tax base and want influence (Bates & Lien, 1989) • tax compliance exchanged for improved accountability (Levi, 1988) But current circumstances not the same as historical conditions... ... more revenue sources, e.g. natural resources and aid (Moore, 1998) ... wider set of tax tools with varying saliency (Chetty et al. 2009) 4
  6. 6. Evidence Qualitative work provides narratives for particular cases: • Colonial export tax on sugar in Mauritius (Brautigam, 2008) • Local tax revenue and in Somaliland (Eubank, 2012) • Comparative analysis of Ghana, Kenya and Ethiopia (Prichard, 2015) The body of quantitative work is small but growing: • Sub-national variation in tax links with democratic rule (Berger, 2009) • Cross-country taxes are positively correlated with measures of democracy (Ross, 2004; Baskaran, 2014 ; Prichard et al. 2018) Limitations: • Endogeneity • Accountability = democracy 5
  7. 7. Data Panel 47 African countries from 1980 until 2015 Revenue ICTD Government Revenue Dataset Accountability Varieties of Democracy (V-DEM) dataset Accountability Horizontal (within State) Diagonal (State - Media/CSO) Vertical (State - Citizens) ElectionsParty 6
  8. 8. V-DEM vs. WB measure 30 35 40 45 50 55 Accountabilty 1980 1990 2000 2010 2020 Notes: The solid and dashed lines represent respectively the V-DEM and World Bank accountability measures. 7
  9. 9. Evolution of accountability 30 40 50 60 70 Accountability 1980s 1990s 2000s 2010s 8
  10. 10. Methodology Fixed effects estimation: ACCi,t = αi + δt + β1Taxi,t + β2NonTaxi,t + βXi,t + γACCi,t−1 + i,t Instrumental variable estimation: ACCi,t = αi + δt + β1Taxi,t + β2NonTaxi,t + βXi,t + i,t Taxi,t = θi + µt + π1ERPIi,t + π2ToTi,t + π3NonTaxi,t + πXi,t + νi,t Shocks to tax: • ERPI, exchange rate pressure index measures export demand and foreign capital flow shocks (Morrissey et al. 2016) • ToT, terms of trade index 9
  11. 11. EPRI Pressure index PIi,t = WE,i ∆Ei,t Ei,t−1 − WRES,i ∆RESi,t RESi,t−1 where E is the exchange rate in local currency units and RES the size of the reserves. WE,i and WRES,i are country-specific weights. Exchange Rate Pressure Index ERPIi,t = sign(PI) × log(1 + |PI|) Assumptions 1. Instruments correlated with tax 2. Shocks should only affect accountability through tax • Relative changes, not levels • Economic crisis → democratisation? Include growth rate as control. • Trade → democratisation? Include trade as control. 10
  12. 12. Results - Baseline FE FE FE-LDV FE-2SLS Total tax 0.217*** 0.255*** 0.078*** 0.667** (0.072) (0.064) (0.019) (0.296) LT effect – – 0.279 – N 1460 1389 1369 1059 Groups 47 47 47 45 Adj. R2 0.390 0.395 0.721 – KP F-stat – – – 24.44 Controls – Notes: Total non-tax is always included. Additional controls are: GDPPC, ODA as well as Trade and Growth in the 2SLS estimation. Robust standard errors in parentheses, clustered at the country-level. ***p ≤ 0.01, **p ≤ 0.05, *p ≤ 0.1. 11
  13. 13. Results - Sub-components FE FE FE-LDV Direct tax 0.211* 0.281** 0.087** (0.116) (0.131) (0.039) Indirect tax 0.296*** (0.105) GST 0.144 0.064 (0.166) (0.063) Trade tax 0.357** 0.092* (0.145) (0.048) N 1182 1046 1035 Groups 45 44 44 Adj. R2 0.384 0.371 0.706 Controls – Notes: Total non-tax is always included. Additional controls are: GDPPC and ODA. Robust standard errors in parentheses, clustered at the country-level. ***p ≤ 0.01, **p ≤ 0.05, *p ≤ 0.1. 12
  14. 14. “Placebo” Test Vertical Diagonal Horizontal Judicial Total tax 0.067*** -0.001 0.006 -0.006 (0.021) (0.011) (0.012) (0.014) N 1437 1437 1437 1437 Groups 47 47 47 47 Adj. R2 0.726 0.940 0.833 0.773 Notes: Total non-tax and lagged dependent variable always in- cluded. Robust standard errors in parentheses, clustered at the country-level. ***p ≤ 0.01, **p ≤ 0.05, *p ≤ 0.1. 13
  15. 15. A small-N perspective 0 2 4 6 OLS estimate 2SLS estimate Uganda 2001 Burundi 2015 Figure shows absolute changes in accountability scores. 14
  16. 16. A large-N perspective I II III IV Total tax 0.279*** 0.271*** 0.259*** 0.231*** (0.066) (0.071) (0.069) (0.068) Urban Pop. 0.109 0.099 (0.310) (0.193) Growth 0.034* 0.038** (0.020) (0.018) Education -0.395* -0.251* (0.214) (0.149) Equality 0.095 0.113 (0.178) (0.149) Critical media 0.510*** 0.536*** (0.095) (0.098) N 1258 1389 1389 1258 Groups 47 47 47 47 Adj. R2 0.382 0.397 0.501 0.501 Notes: Total non-tax, GDPPC and ODA included as controls. All regressors are standardised in the sense that they represent deviations from the mean divided by the standard deviation. 15
  17. 17. Conclusion Puzzle Is taxation still linked with improvements in accountability in contemporary developing countries? Result (1) Evidence for a positive effect (2) Heterogeneity across taxes Implications (1) Support for state-building narrative in tax reform (2) But tax reforms mostly focus on indirect taxation (3) Effect is small But ... ... what about cross-country heterogeneity? ... what are the necessary conditions? ... is there a responsiveness versus accountability trade-off? 16
  18. 18. Questions? 16
  19. 19. Summary Statistics Variable Mean Std. Dev. Min. Max. N Accountability 51.51 7.21 35.43 65.15 1687 Total tax 14.68 8.12 0.6 54.31 1528 Total Revenue 17.2 8.97 0.68 58.99 1363 Total non-tax 3.7 5.04 0 46.48 1485 Direct tax 4.94 3.94 0.12 28.11 1228 Indirect tax 9.35 5.27 0.47 43.32 1313 Diagonal accountability 52.43 7.91 32.5 66.45 1687 Horizontal accountability 49.11 8.30 29.65 66.03 1687 Judicial accountability 50.34 10.18 25.78 71.83 1687 Voice and Accountability 37.75 14.6 6.48 70.49 797 GDPPC 1801.14 2680.56 115.79 20333.94 1619 ODA 12.25 12.76 -0.26 181.1 1575 ER 4,021,461 164,417,600 0 6,723,052,073 1672 Reserves 1,520,794,147 5,565,650,748 -628,535 53,599,283,557 1454 Terms of Trade 116.57 44.29 21.4 357.58 1582 Growth 1.31 7.58 -50.23 140.5 1571 Trade 74.53 47.42 6.32 531.74 1518 Critical media 51.06 12.44 17.83 78.63 1687 Rule of law 53.5 11.51 25.63 82.3 1687 Equality 54.58 2.2 50.38 59.02 1687 Civil society 55.77 2.39 50.58 59.49 1687 Education 3.65 1.98 0.17 10.46 1534 Urban population 34.19 16.11 4.34 87.16 1688 Military exp. 2.44 3 0.14 39.61 1331 Natural resources rents 12.4 12.94 0 89.17 1610 back

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