I really like taxes. They could be an effective instrument for making democracy work. A famous slogan in the American independence struggle was “no taxation without representation”. I think the (slightly adapted) opposite also holds true: No participation without taxation.
Everybody should pay taxes. Even the very poorest. Of course, the poorest should get more out of it then they put into (of course a tax system should be progressive and of course it should have a redistributional function)*. But every citizen should make her or his contribution to making the state to what it should be: a reliable provider of public goods.
When I asked two of SAEP‘s bridging year students in Cape Town what according to them were the major problems in the township they live in, they came up with a list of things: unemployment, poverty, gangsterism, early pregnancy, laziness, lack of positive role models. But then they told me, the basic problem is deeper: It is the mindset of “the world owes me so much”.
I have the impression that for not few poor people in developing countries this mindset characterises their view of the state: “The state should give me a house, food, education, and when I really think about it, also a nice new car.”
Don’t get me wrong, I don’t want to promote neoliberal ideology here. I am absolutely convinced that the state should provide education and social security. And of course, poor people in developing countries can point at decades and centuries of socio-economic injustice and abuse that created the conditions they were born into.
But I think we have to start from where we are. And I think for making collective progress it is much more powerful if we can ask the state to provide the service we just paid for, instead of just opening our hands because it is our historical right. It would change our view of ourselves, and the rigour with which we actually demand delivery.
I thus think taxes are a very powerful means to create and maintain the connection between the state and the people (in “developing countries” as much as in rich countries). Much more directly and much more frequently than elections. Of course, this requires that the tax payers have the means to control if the state really delivers, and to react if it doesn’t.
Here how I would do it:
The major share of taxes should go to as local budgets as possible. In particular the major share of taxes from low incomes. For high incomes, I would set a maximum amount from which on they go into the central budget. High incomes should not just fund their own local infrastructure, nor should local municipalities compete for high income people by investing only in respective infrastructure. This of course needs to be combined with a well designed local government system, including local elections, and full tax and budget transparency. If my local public office holder then embezzles money, she or he would steal it from me and my 2000 neighbours, not from somebody living at the other end of the country.
All taxes, including the share that goes into the central budget, should be collected by local office holders. They should be responsible for transferring the respective share to the centre and accountable to the local tax-payers for where the money ends up. Of course they need to be equipped with the means to put pressure on the central government. The central government should at the same time have the means to make sure that the local office holders transfer the correct amounts.
In short, local office holders should be accountable to their local constituency for what happens with their taxes, and central governments should be accountable to local office holders while having the legal means to make local office holders transfer the correct share to the centre.
There should be no, not the smallest, exceptions or special treatments in the tax system. If there are systematic disadvantages that need to be adjusted for, this should happen in the form of a transparent system of compensation payments. It should be absolutely transparent and clear who receives how much as a subsidy (tax loopholes are nothing else but subsidies).
Two final points:
First, I think donors should shift their focus from government to tax payer support. Rather than throwing billions into budget support schemes, which enable governments to take credit for work they didn’t do or did badly, they should support citizens with paying their taxes and requesting proper services in return.
Finally, tax havens should be confronted with extremely harsh visa and customs conditions for their citizens and residents. If Switzerland for example isn’t willing to properly tax the rich tax-refugees from its European neighbours, then it should be harder for Swiss citizens to enter the EU than it is for poor citizens of African countries. Sorry, brothers and sisters from Switzerland, I am a big fan of your country, culture, and people, but I find it simply disgraceful to make money by undermining other countries’ tax systems. Make an effort and press you governments to change this.
* At the University of Cape Town, I was talking to a student representative of DASO, the student branch of South Africa’s liberal DA party. He told me with an expression of indignation that in South Africa a few million people pay the taxes for 40 million people. I replied that I hope so in the country with the world’s highest Gini Coefficient (measure of income inequality). In fact, it would make sense to me to adjust the gradient and roof rate of a progressive tax system according to the inverse of the country’s Gini Coefficient.
On the other hand, I agreed with the DASO representative that everybody in South Africa should pay taxes. But in steep progressive rates, and with a very high roof rate of maybe Scandinavian levels.