Skip to content

JoIE Blog

The official blog of the Journal of Institutional Economics

Menu
  • Home
  • Latest Posts
  • Editor-in-chief page
  • About this journal
    • Aims
    • Citation Impact
    • Notes for Contributors
    • Complaints and Appeals Procedures
    • Editors
    • International Advisory Board
    • Journal Issues
    • Elinor Ostrom Prize
    • Supplementary Material
    • Conflict of Interest Policy
  • Contact
Menu

How do political institutions affect fiscal capacity? Explaining taxation in developing economies”

Posted on February 11, 2019March 14, 2023 by Nikhilesh Sinha

Summary of JOIE article “How do political institutions affect fiscal capacity? Explaining taxation in developing economies”, by  Roberto Ricciuti, University of Verona and CESifo; Antonio Savoia, Global Development Institute, University of Manchester; and Kunal Sen, UNU-WIDER and Global Development Institute, University of Manchester. The full article is available on the JOIE website.

The capability to raise revenues from taxes – often called fiscal capacity – is a crucial aspect for the functioning of every state, particularly in developing countries. Two reasons account for this. First, greater fiscal capacity is fundamentally important for state formation, as it is usually associated with the creation of a civilian bureaucracy that can itself provide an enabling environment for the consolidation of statehood. Second, greater fiscal capacity implies greater access to resources needed to provide public goods. Developing countries are only able to raise a small share of taxes over GDP compared to advanced economies. They need higher revenues to invest in a number of economic and social areas that are crucial for their growth, such as healthcare, education and infrastructure. This is also relevant to pursue the Sustainable Development Goals (SDGs) by 2030, an ambitious enterprise requiring far greater resources. Indeed, SDG 17 explicitly refers to the mobilisation of government revenues (Target 17.1).

Our recent research1 finds that learning to tax depends on what kind of political institutions are in place. Political systems that place stronger constraints on the executive power are more likely to lead to taxation systems that have a higher degree of transparency towards their citizens. This is because in such systems non-state actors can control and limit the elites’ access to resources. Thus, they are able to demand greater accountability on the part of the state with respect to the taxes they pay. In turn, processes of tax payment and collection characterised by greater transparency and accountability of tax authorities make taxation more consensual between states and citizens. This builds tax morale and has a significant effect on the amount of revenues raised.

Based on a sample of 47 developing economies, our analysis looks at whether greater constraints on the executive have a positive effect on the transparency of the taxation system. We use a popular measure of the effectiveness of checks and balances on the executive power by Polity IV as well as a set of indicators created by the Public Expenditure and Financial Accountability project to capture the degree of transparency and accountability of tax authorities. For example, we selected a variable evaluating taxpayers’ access to information on tax liabilities and administrative procedures (Figure 1) and one assessing the quality and functioning of tax appeals mechanisms (Figure 2). Using various estimation methods to check the robustness of our results, we first conclude that the existence of effective constraints on the executive makes tax systems more accountable and transparent.

antonio-savoia-fig-1

Figure 1 – Transparency of taxpayer obligations and liabilities
and constraints on the executive

Source: Ricciuti R., Savoia A. and Sen K. (2019), “How do political institutions affect fiscal capacity? Explaining taxation in developing economies”, Journal of Institutional Economics, forthcoming.


Figure 2
 – Quality of tax appeals mechanisms
and constraints on the executive.

antonio-savoia-fig-2

Source: Ricciuti R., Savoia A. and Sen K. (2019), “How do political institutions affect fiscal capacity? Explaining taxation in developing economies”, Journal of Institutional Economics, forthcoming.

Does this have an effect on tax revenues? Our second key finding is that a typical increase in the constraints on the executive index results in an average growth in total tax revenues or income tax revenues (measured as a share of GDP) of 2.4 percentage points over just under a decade. Bearing in mind that developing economies typically raise 10-20% of their GDP in taxation, this is a significant impact.

So, an important way for developing countries to learn how to tax is to strengthen the political institutions providing effective checks and balances on the executive’s discretionary power. Designing and implementing reforms in this direction presents challenges, such as opposition from elites who stand to lose from political change. Benefits may only materialise in the medium- or long-term. But it is still worth trying. After all, mobilising revenues is itself a development target in the SDGs. It is also crucial for providing the much-needed resources to make progress on all the other targets, thereby generating synergies across different development goals.


Note: This summary was first published on OECD Development Matters

Share this…
  • Google
  • Email
  • Facebook
  • Whatsapp
  • Twitter
  • Linkedin
  • Print

Leave a Reply Cancel reply

You must be logged in to post a comment.

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Related Links

Cambridge University Press

Journal of Institutional Economics homepage

WINIR

Search the site

Find posts by keywords

Africa Article summary bibliometrics common-pool resource Comparative Development Competition convergence COVID-19 Cultural dimensions Culture Democracy discrimination Economic freedom Economic institutions Economics Structure Elinor Ostrom Prize Entreprensurship environmental institutions Financial Institutions formal institutions game theory Historical Political Economy Hofstede Informal Constraints informal institutions informal rules institutional economics institutions money Ostrom Political institutions polycentric governance Polycentricity property rights public goods rule of law Rule of Law Index Symposium on Corporations taxation transaction costs trust Uncategorized United States USSR Violence

Categories

  • Article Summary (66)
  • Blog Editor Post (4)
  • Uncategorized (2)

Archives

  • June 2025
  • May 2025
  • April 2025
  • February 2025
  • December 2024
  • November 2024
  • October 2024
  • September 2024
  • July 2024
  • April 2024
  • December 2023
  • September 2023
  • August 2023
  • February 2023
  • September 2022
  • June 2022
  • March 2022
  • November 2021
  • September 2021
  • June 2021
  • May 2021
  • April 2021
  • January 2021
  • November 2020
  • September 2020
  • July 2020
  • June 2020
  • April 2020
  • March 2020
  • October 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • Corruption and informal practices in the Middle East and North Africa: a pooled cross-sectional analysis
  • Jaurès’s The New Army (1911): the organisation of democratic institutions as war prevention
  • Bringing emotions into post-Northian institutional economics: a reading inspired by John Dewey
  • Understanding Masahiko Aoki’s comparative institutional analysis
  • Heterogeneous effects of economic freedom on human capital in developing countries
RSS Error: WP HTTP Error: A valid URL was not provided.
RSS Error: WP HTTP Error: A valid URL was not provided.
RSS Error: WP HTTP Error: A valid URL was not provided.
RSS Error: WP HTTP Error: A valid URL was not provided.
©2025 JoIE Blog | Built using WordPress and Responsive Blogily theme by Superb