Taxation, non tax revenue and democracy
Taxation, Non-Tax Revenue and Accountability: New Evidence Using New Cross-Country Data. Resource curse, i.e. the theory stating that natural resource-rich countries that heavily rely on resource revenues are more likely to develop autocratic or dictatorial regimes, has been vastly investigated in the literature. However, although there exists numerous numbers of cross-country studies of the political resource curse, conflicting results and inconsistencies continue to emerge after more than a decade. These inconsistencies can be attributed to imprecise indicators and poor data quality, inconsistent estimation methods, and failure at distinguishing alternative causal processes, linked to tax and non-tax revenue. The main innovation of this paper is the use of the ICTD GRD to re-investigate the relationship between government revenues and democracy. Indeed, this new dataset allows for a clear decomposition of government revenue into tax and non-tax revenue, the latter being mainly composed of natural resource revenues. Then, multiple econometric estimation methods are employed to ensure better robustness of the results (including GMM, Mean-Group, Random and Fixed-Effect, and Logit Error Correction Model). Finally, a whole set of robustness checks are run with the inclusion of longer lags on the revenue variables, alternative measures of democracy and different time periods among others. The authors find stronger evidence of the resource curse than previous studies as the impact of either tax reliance or non-tax revenue on democracy is negative and significant in all the specifications and methods. The relationship between tax and democracy is more ambiguous, sometimes positive but most often insignificant. This may reflect a greater complexity of causal processes between those two variables. An important finding is that this relationship happens to operate over the long term, i.e. results are stronger with estimators that focus on longer-term changes in composition of government revenue, rather than short-term variation. Finally, the paper has been made easy to be replicated in order to allow for future comparisons using the ICTD GRD.
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Taxation, non tax revenue and democracy
- 1. Taxation, Non-‐‑Tax Revenue and Democracy Wilson Prichard Interna1onal Center for Tax and Development
- 2. Background • Large body of cross-‐country econometric studies of the poli1cal resource curse -‐ but conflic1ng results con1nue aAer more than a decade • Why such inconsistency? § Imprecise indicators – most theories of resource curse focus on sources of government revenue as share of GDP, but most tests use total resource income § Problema2c and variable data – most studies use ‘custom’ datasets, many of which have major weaknesses § Inconsistent methods – and evidence that capturing complex poli1cal rela1onships using cross-‐country methods can be highly sensi1ve to methods § Do not dis2nguish alterna2ve causal pathways, linked to tax and non-‐tax revenue
- 3. Research Strategy 1. Be=er indicators – drawing on ICTD GRD allows us to focus on government revenue from, respec1vely, non-‐ resource taxes and non-‐tax revenue (primarily non-‐ renewable natural resources) 2. Be=er data – Our data is more complete than earlier studies looking at government revenue 3. Mul2ple econometric methods -‐ Sys-‐GMM, Mean-‐Group, Random and Fixed Effects Logit, Error Correc1on Model 4. Test mul2ple pathways – tax reliance, total tax revenue, total non-‐tax revenue
- 4. Descriptive Data Tax Reliance and Polity, 1990-2010 NONRLD FIN AUT AUS JPN KSV SWE SVN SVK SRB SLV PAN PER AFG AGO CYP IRL CRI CZE FRA ITA JAM CPV ALB ARE LTU BEL ARG ARM AZE BDI BEN BGD BFA BGR BHR BIH BLR BOL BRA BWA BTN CAF CHCEAN CHL UGA CHN CIV CMR COG COL COM DEU DJI DNK DOM DZA ECU EGY ERI ESP EST ETH FJI GAB GBR GEO GHA GIN GMB GNB GNQ GRC GTM GUY HND HRV HTI HUN IDN IND IRN IRQ ISR JOR KAZ KEN KGZ KHM KOR KWT LAO LBN LBR LBY LKA LSO LVA MAR MDA MDG MEX MKD MLI MMR MNE MNG MOZ MRT MUS MWI MYS NAM NER NGA NIC NPL NZL PAK PHL PNG POL PRT PRY QAT RUS ROM RWA SAU SDN SEN SGP SLB SLE SUR SWZ SYR TCD TGO THA TJK TKM TMP TTO TUN TUR TZA UKR URY USA UZB VEN VNM YEM ZAF ZAR ZMB ZWE 0 20 40 60 80 100 Level of Decmoracy (Polity2) 0 .2 .4 .6 .8 1 Tax Reliance Total Tax Revenue and Polity, 1990-2010 AGO AFG SLB SVK SLV SRB THA ALB ARE JPN ARG ARM AUATUS PPAENR MEX TJK COG AZE BDI BEL BEN BFA BGD PRT MDA BGR BHR BIH BLR BOL BRA BTN BWA CAF CHE CAN CHL KGZ KEN CIV CHN CMR COL COM CPV CRI CUB CYP CZE DEU DJI DNK DOM DZA ECU EGY ERI ESP EST ETH FIN FJI FRA GAB GBR GEO GHA GIN GMB GNB GNQ GRC GTM GUY HND HRV HTI HUN IDN IND IRL IRN IRQ ISR ITA JAM JOR KAZ KHM KOR KSV KWT LAO LBN LBR LBY LKA LSO LTU LVA MAR MDG MKD MLI MMR MNE MNG MOZ MRT MUS MWI MYS NAM NGANER NIC NOLDR NPL NZL PAK PHL PNG POL PRY QAT ROM RUS RWA SAU SDN SEN SGP SLE SUR SVN SWE SWZ SYR TCD TGO TKM TMP TTO TUN TUR TZA UGA UKR URY USA UZB VEN VNM YEM ZAF ZAR ZMB ZWE 0 20 40 60 80 100 120 Level of Decmoracy (Polity2) 0 10 20 30 40 50 Total Tax Revenue as % of GDP NZL Total Non Tax Revenue and Polity, 1990-2010 CRICYP SVN AUASUT USA IRL DNK SWE NNLDOR JPN MUS BEL CZE PRT MNE SVK MDA MKD URY DOM FRA KSV POL SLV HND NAM SRB MNG THA PHL CPV NIC PER PAN KOR PNG HRV BEN MEX LBN MDG PRY SEN MLI NPL KHM BGD PAK GMB GNB MOZ KGZ LBR MWI ZMB KEN UGA CIV AFG AGO BOL ALB ARE ARG ARM AZE BDI BFA BGR BHR BIH MRT BLR BRA BTN BWA CAF CCHAEN CHL CHN CMR COG COL COM DEU DJI DZA ECU EGY ERI ESP EST ETH FIN FJI GAB GBR GEO GHA GIN GNQ GRC GTM GUY HTI HUN IDN IND IRN IRQ ISR ITA JAM JOR KAZ KWT LAO LBY LKA LSO LTU LVA MAR MMR MYS NER NGA QAT ROM RUS RWA SAU SDN SGP SLB SLE SUR SWZ SYR TCD TGO TJK TKM TMP TTO TUN TUR TZA UKR UZB VEN VNM YEM ZAF ZAR ZWE 0 20 40 60 80 100 Level of Decmoracy (Polity2) 0 20 40 60 80 Total Tax Collection as % of GDP
- 5. Model Specification • Data from ICTD GRD 1990-‐2010, to maximize completeness and accuracy • Three independent variables: tax reliance (tax/ total rev), total tax % of GDP, total non-‐tax % of GDP • Dependent variable is democracy: Con1nuous variable based on Polity IV for Sys-‐GMM, MG and ECM es1mates, binary variable based on Cheibub et al. 2010 • Controls from earlier studies: Log GDP, Civil War, Democra1c Diffusion, Growth per capita, popula1on size
- 6. Core Results Sys-‐ GMM Sys-‐ GMM CCE-‐MG CCE-‐MG FE Logit FE Logit RE Logit RE Logit ECM ECM Tax_Rel 15.87*** 20.60*** 7.66** 1.51 10.34 (5.26) (7.62) (3.3890) (1.04) (10.45) Total Tax -25.56* 51.76 21.69 -6.27* -34.38 (15.22) (35.15) (15.80) (3.74) (26.86) Total Non-‐tax -29.8*** -155.2** -15.05 -12.59** -36.0*** (10.1) (66.4) (10.09) (5.36) (13.25) Groups 152 152 149 144 28 28 157 157 153 153 Obs 2536 2536 2634 2604 458 458 2305 2305 2539 2539
- 7. Core Results Sys-‐ GMM Sys-‐ GMM CCE-‐MG CCE-‐MG FE Logit FE Logit RE Logit RE Logit ECM ECM Tax_Rel 15.87*** 20.60*** 7.66** 1.51 10.34 (5.26) (7.62) (3.3890) (1.04) (10.45) Total Tax -25.56* 51.76 21.69 -6.27* -34.38 (15.22) (35.15) (15.80) (3.74) (26.86) Total Non-‐tax -29.8*** -155.2** -15.05 -12.59** -36.0*** (10.1) (66.4) (10.09) (5.36) (13.25) Groups 152 152 149 144 28 28 157 157 153 153 Obs 2536 2536 2634 2604 458 458 2305 2305 2539 2539
- 8. Core Results Sys-‐ GMM Sys-‐ GMM CCE-‐MG CCE-‐MG FE Logit FE Logit RE Logit RE Logit ECM ECM Tax_Rel 15.87*** 20.60*** 7.66** 1.51 10.34 (5.26) (7.62) (3.3890) (1.04) (10.45) Total Tax -25.56* 51.76 21.69 -6.27* -34.38 (15.22) (35.15) (15.80) (3.74) (26.86) Total Non-‐tax -29.8*** -155.2** -15.05 -12.59** -36.0*** (10.1) (66.4) (10.09) (5.36) (13.25) Groups 152 152 149 144 28 28 157 157 153 153 Obs 2536 2536 2634 2604 458 458 2305 2305 2539 2539
- 9. Robustness Checks Te sts Results Longer Lags on Revenue Variables More significant and higher magnitude – including the disappearance of nega1ve coefficients on the total tax variable for Sys-‐GMM and RE Logit Alterna1ve measures of democracy Significant in most specifica1ons, but not for MG es1mator Different country groups Results weakened, but generally s1ll significant, without OPEC. Results stronger without OECD. Different Time Periods Results gradually lose significant going back to 1980, consistent with lower quality data and the rela1onship becoming stronger over 1me Central government data All significant, but magnitude and significance diminished with less good data
- 10. Conclusions Strong evidence of resource curse: Nega1ve impact of either tax reliance or non-‐tax revenue on democracy in all specifica1ons and methods Ambiguous evidence on tax and democracy: Rela1onship is some1mes posi1ve, but most oAen insignificant. May reflect greater complexity of causal processes. Rela2onship operates in levels, not year-‐to-‐year varia2on: Results are stronger with es1mators that focus on longer-‐term changes in composi1on of government revenue, rather than short-‐term varia1on. Be=er Data Ma=ers: All results are much stronger using ICTD Government Revenue Data than when using Haber and Menaldo data on resource income, and post-‐1990 data that accounts for federal states. Cau2on and Transparency are Key: Different methods yield significant vola1lity, as do different data, making comprehensive, transparent, approached cri1cal
- 11. Marginal Effects from RE Logit
- 12. Results with three and five year lags Sys-‐GMM (3) Sys-‐GMM (5) Sys-‐GMM (3) Sys-‐GMM (5) RE Logit (3) FE Logit (5) RE Logit (3) RE Logit (5) Tax_Rel 19.4390** 23.8694** 4.4561*** 7.2327*** (7.9695) (10.0033) (1.6442) (2.0780) Total Tax 7.0397 22.2667 -2.3642 7.8482 (31.2309) (39.0345) (5.0183) (6.7844) Total Non-‐ tax -39.0786** -35.7187 -16.4260*** -20.2697*** (17.1580) (32.7934) (5.7189) (6.9277) Groups 155 152 155 152 156 152 156 152 Obs 2308 2024 2308 2024 2025 1730 2025 1730