Transcript Political economy of tax regimes in South Asia: The Context

Political economy of tax
regimes in South Asia:
The Context
By
G. Shabbir Cheema
Director
Asia-Pacific Governance and Democracy Initiative
East-West Center
Honolulu, Hawaii
Presented to The Workshop on Tax Systems in
South Asia, held in Singapore
August 8-9, 2010
I. INTRODUCTION

Duality in South Asia --- growth, entrepreneurship and
innovation; yet, high incidence of poverty, low levels of human
development, and low levels of MDGs achievements

The need for democratic and effective state to bridge the gap
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Tax regimes a key instrument for state formation and its capacity
to survive to meet emerging challenges from the increasingly
informed citizens (South Africa, Brazil, Malaysia with high tax
collection as a percentage of GDP)

An understanding of the processes of conflict and bargaining
essential to assess taxation and institutional formation
II. Political Economy of Tax Regimes: Conceptual
Framework
The extent and nature of
lobbies influence over
policy formulation and
implementation
Formal and informal
lobbies and their political
and economic interests
Effective Tax
Regimes
Political factors
affecting the policies
and institutional
arrangements for fiscal
federalism and
decentralization
Governance capacity
for political
management
III: Political Economy
Components
1. Lobbies and their political and economic interests
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importers, exporters, consumer groups, merchants, landowners, government officials, business leaders etc.
The role of special interests to gain at the expense of the
general population; narrow interest coalitions leading to the
interests of a few benefitting, at the expense of equity;
rent seeking through discriminatory application and its
impacts on the legitimacy of the public institutions in the
eyes of citizens
political parties and their organizational capacity; power
base of interest groups and classes in party politics
III: Political Economy
Components
2. The extent and nature of lobbies influence
over policy formulation and implementation?

Influence over the design of policies and rules
that are aimed at reducing opportunities for
special interest and rent-seeking behavior of the
political and administrative elite

The need for governance autonomy from
pressures of special interests

Focus of policy-making process on short-term
instead of long-term needs
III: Political Economy
Components
3.
Political factors affecting the policies and institutional
arrangements for fiscal federalism and
decentralization?

Historical perspective including the colonial legacy as the starting
point

Role of political organizations that mediate conflicts between
interest groups and classes

large proportion of revenue through external sources i.e. overseas
remittances, foreign assistance

political obstacles as the root cause of low tax collection,

autonomy as a contested notion
III: Political Economy
Components
3.
Political factors affecting the policies and institutional
arrangements for fiscal federalism and
decentralization?

level of political commitment to reform by the political leaders and
bureaucracy

inadequate political mechanisms for bargaining among the
competing interest groups

Complexity of reform in federal systems with several levels of
political authority; reforms in the system of intergovernmental
transfers, decentralization to local governments, market
borrowing by state government.

new forms of decentralization and delegation to change powers
among different levels of government.
III: Political Economy
Components
4.
Governance capacity for political management
Capacity to manage political power in general and ability to
design and implement tax system reform in particular through:
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the articulation of the need for reform
consistency and clarity of national policies including
coordination among agencies
balancing competing interests
mobilizing political support through alliances
deliver services with transparency and accountability
Administrative constraints: insufficient staff with appropriate
skills and low wages; ill-defined tax laws; poor enforcement
and corruption; weak information collection and tax-payer
identification
IV: Summing up

The impact of the above on reform efforts
in South Asia, recognizing
 Politics is the art of the possible
 Need to push the envelope for change through
governance capacity for political management
and effective policies and institutional
arrangements for decentralization, including
fiscal federalism