Taxation, Democracy and State-Building: How Does Sequencing Matter?

Abstract

What is the relationship between democracy and taxation, under conditions of ‘reverse’ sequencing? Existing theories about taxation and democracy have presumed this relationship to be positive, but they have largely been predicated on the West’s historical evolution where the state became strong before it became democratic. The ‘reverse’ sequencing most developing countries are experiencing – democratizing before they consolidate their statehood – may have important implications for their ability to tax. The paper argues that taxing in a context of weak state capacity necessitates state-building with intrinsically coercive elements, as citizens have few incentives to voluntarily comply. The paper hypothesizes that democracy reduces the ability of the state to coerce and that this has implications for how it can tax. The empirical section uses a most similar systems design to compare a democracy, Lesotho, with an autocracy, Rwanda, demonstrating how the mechanics of this process operate: how governments incentivize bureaucracies into certain kinds of tax collection, depending on regime type; how this then affects the different levels of state-building activities the tax authority engages in; and how this cumulatively impacts on tax outcomes.