Critical Issues in Taxation and Development CESifo Seminar Series edited by Hans-Werner Sinn Economics and Psychology: A Promising New Field Bruno S Frey and Alois Stutzer, editors Institutions and Norms in Economic Development Mark Gradstein and Kai A Konrad, editors Pension Strategies in Europe and the United States Robert Fenge, Georges de Ménil, and Pierre Pestieau, editors Foreign Direct Investment and the Multinational Enterprise Steven Brakman and Harry Garretsen, editors Sustainability of Public Debt Reinhard Neck and Jan-Egbert Sturm, editors The Design of Climate Policy Roger Guesnerie and Henry Tulkens, editors Poverty, Inequality, and Policy in Latin America Stephan Klasen and Felicitas Nowak-Lehmann, editors Guns and Butter: The Economic Laws and Consequences of Conflict Gregory D Hess, editor Institutional Microeconomics of Development Timothy Besley and Rajshri Jayaraman, editors Dimensions of Competitiveness Paul DeGrauwe, editor Reforming Rules and Regulations Vivek Ghosal, editor Fertility and Public Policy Noriyuki Takayama and Martin Werding, editors Perspectives on the Performance of the Continental Economies Edmund S Phelps and Hans-Werner Sinn, editors Industrial Policy for National Champions Oliver Falck, Christian Gollier, and Ludger Woessmann, editors Illicit Trade and the Global Economy Cláudia Costa Storti and Paul De Grauwe, editors The Continuing Evolution of Europe Thiess Buettner and Wolfgang Ochel, editors The Evolving Role of China in the Global Economy Yin-Wong Cheung and Jakob de Haan, editors Critical Issues in Taxation and Development Clemens Fuest and George R Zodrow, editors A list of the entire series is available at http://mitpress.mit.edu Critical Issues in Taxation and Development edited by Clemens Fuest and George R Zodrow The MIT Press Cambridge, Massachusetts London, England © 2013 Massachusetts Institute of Technology All rights reserved No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher MIT Press books may be purchased at special quantity discounts for business or sales promotional use For information, please email special_sales@mitpress.mit.edu or write to Special Sales Department, The MIT Press, 55 Hayward Street, Cambridge, MA 02142 Set in Palatino by Toppan Best-set Premedia Limited Printed and bound in the United States of America Library of Congress Cataloging-in-Publication Data Critical issues in taxation and development / edited by Clemens Fuest and George R Zodrow p cm — (CESifo seminar series) Includes bibliographical references and index ISBN 978-0-262-01897-5 (hbk : alk paper) Taxation—Developing countries Tax evasion—Developing countries Economic development—Developing countries I Fuest, Clemens, 1968– II Zodrow, George R HJ2319.C75 2013 336.200912'4—dc23 2012036427 10 Contents Series Foreword vii I Introduction Clemens Fuest and George R Zodrow Taxation and Development—Again Michael Keen 13 II Do Companies View Bribes as a Tax? Evidence on the Tradeoff between Corporate Taxes and Corruption in the Location of FDI 45 Timothy Goodspeed, Jorge Martinez-Vazquez, and Li Zhang Do Corruption and Taxation Affect Corporate Investment in Developing Countries? 65 Clemens Fuest, Giorgia Maffini, and Nadine Riedel Investment Treaties and Hydrocarbon Taxation in Developing Countries 83 Johannes Stroebel and Arthur van Benthem III The Effect of a Low Corporate Tax Rate on Payroll Tax Evasion 109 Boryana Madzharova vi Contents International Profit Shifting and Multinational Firms in Developing Countries 145 Clemens Fuest, Shafik Hebous, and Nadine Riedel Too Low to Be True: The Use of Minimum Thresholds to Fight Tax Evasion 167 Mirco Tonin IV Fiscal Federalism and Foreign Transfers: Does Interjurisdictional Competition Increase the Effectiveness of Foreign Aid? 189 Christian Lessmann and Gunther Markwardt 10 Taxation and Democracy in Developing Countries 217 Paola Profeta, Riccardo Puglisi, and Simona Scabrosetti List of Contributors Index 241 239 Series Foreword The CESifo Seminar Series aims to cover topical policy issues in economics from a largely European perspective The books in the series are products of papers and intensive debates that took place during the seminars hosted by CESifo, an international research network of renowned economists organized jointly by the Center for Economic Studies at the Ludwig-Maximilians-Universität and the Ifo Institute for Economic Research The publications in this series have been carefully selected and refereed by members of the CESifo research network I Yes No Yes No 256 25 0.28 0.683 [0.75] [0.04] 0.032 –0.086 [1.48] [3] Corporate income tax Yes No 332 30 0.68 –2.581** [2.60] [6.02] –4.331*** –0.246*** [3.48] [4] Direct taxes Yes No 335 30 0.53 –4.236*** [2.95] [4.76] –5.598*** –0.108 [1.67] [5] Indirect taxes Yes No 247 23 0.35 [.] [1.56] –0.196 –0.009 [1.00] [6] Property taxes Yes No 329 30 0.32 –0.649 [0.51] [1.30] –1.349 0.084** [2.36] [7] Trade taxes Yes No 285 27 0.89 –11.39*** [10.15] [8.46] –9.978*** –0.096 [1.34] [8] Social security contributions GDP per worker is expressed in thousands of PPP dollars Region dummies are included, with new EU members as the excluded category Standard errors are clustered at the country level, and the corresponding t statistics are reported in brackets below each coefficient Asterisks denote significance at the 10% (*), 5% (**), and 1% (***) levels Yes Year fixed effects 227 336 No Observations Country fixed effects 23 30 Number of countries 0.88 0.91 R2 –3.397*** [5.92] –17.92*** [10.26] [9.72] [16.37] Asia dummy –4.957*** –20.44*** Latin America dummy –0.085*** [3.58] [2] Personal income tax –0.275** [2.67] [1] Tax revenue Agriculture/GDP Dependent variable Table 10.4 (continued) Taxation and Democracy 229 0.424 [1.21] –0.043 [0.77] –0.118 [1.18] 0.97 38 467 Yes Yes Civil liberties index Polity index GDP per worker R2 Number of countries Observations Country fixed effects Year fixed effects Yes Yes 313 30 0.97 –0.033 [1.00] –0.019 [0.95] 0.141 [1.03] [2] Personal income tax Yes Yes 342 32 0.73 0.184 [1.34] 0.039 [0.56] 0.387 [1.18] [3] Corporate income tax Yes Yes 463 38 0.89 0.072 [0.74] –0.028 [0.80] 0.42 [1.39] [4] Direct taxes Yes Yes 466 38 0.83 –0.052 [0.56] –0.023 [0.49] 0.011 [0.05] [5] Indirect taxes Yes Yes 345 28 0.78 –0.053*** [3.41] –0.001 [0.12] –0.080* [2.03] [6] Property taxes Yes Yes 457 38 0.68 –0.112 [1.02] 0.061** [2.20] –0.087 [0.71] [7] Trade taxes Yes Yes 360 32 0.99 –0.06 [1.19] –0.028 [0.84] 0.118 [1.18] [8] Social security contributions GDP per worker is expressed in thousands of PPP dollars Standard errors are clustered at the country level, and the corresponding t statistics are reported in brackets below each coefficient Asterisks denote significance at the 10% (*), 5% (**), and 1% (***) levels [1] Dependent variable Tax revenue Table 10.5 Tax sources and political factors, controlling for GDP—country fixed effects, 1990–2005 (excluding Indonesia) 230 Profeta, Puglisi, and Scabrosetti 0.267 [0.73] –0.063 [0.71] –0.139 [1.28] –0.096 [0.97] –0.005 [0.45] 0.97 36 399 Yes Yes Civil liberties index Polity index GDP per worker Unemployment rate Inflation rate R2 Number of countries Observations Country fixed effects Year fixed effects Yes Yes 261 27 0.97 0.004 [0.47] –0.075 [1.62] –0.054 [1.33] –0.009 [0.45] 0.143 [1.03] [2] Personal income tax Yes Yes 290 29 0.74 –0.005 [0.57] –0.091 [1.59] 0.197 [1.46] 0.081 [0.90] 0.305 [1.03] [3] Corporate income tax Yes Yes 395 36 0.9 [0.03] –0.143** [2.49] 0.052 [0.54] 0.003 [0.05] 0.259 [0.87] [4] Direct taxes Yes Yes 398 36 0.82 0.007 [0.75] –0.025 [0.44] –0.066 [0.71] –0.049 [0.67] –0.04 [0.17] [5] Indirect taxes Yes Yes 277 26 0.8 –0.001 [0.65] 0.041*** [3.29] –0.048*** [3.56] –0.006 [1.01] –0.031 [0.80] [6] Property taxes Yes Yes 390 36 0.68 –0.005 [0.59] 0.047 [1.25] –0.101 [0.91] 0.072** [2.18] –0.05 [0.41] [7] Trade taxes Yes Yes 330 31 0.98 –0.006 [1.03] –0.018 [0.34] –0.067 [1.41] –0.032 [0.93] 0.133 [1.13] [8] Social security contributions GDP per worker is expressed in thousands of PPP dollars Standard errors are clustered at the country level, and the corresponding t statistics are reported in brackets below each coefficient Asterisks denote significance at the 10% (*), 5% (**), and 1% (***) levels [1] Dependent variable Tax revenue Table 10.6 Tax sources and political factors, controlling for GDP, unemployment, and inflation—country fixed effects, 1990–2005 (excluding Indonesia and hyperinflation years.) Taxation and Democracy 231 –0.053 [1.37] –0.086 [1.39] –0.07 [0.98] –0.109 [0.78] –0.119 [1.00] Polity index GDP per worker Unemployment rate 0.003 [0.74] –0.028 [1.51] Trade openness index 0.002 [0.31] –0.012 [1.05] Inflation rate –0.005 [0.26] 0.146 [1.12] 0.255 [0.75] Civil liberties index [2] [1] Personal income tax Dependent variable Tax revenue [1.36] 0.013 –0.022*** [2.99] [2.94] –0.174*** 0.234* [1.88] 0.088 [0.95] –0.018 [0.12] [3] Corporate income tax [0.90] 0.008 –0.016* [1.82] [2.69] –0.204** 0.113 [0.88] –0.002 [0.04] 0.18 [0.76] [4] Direct taxes [1.44] –0.031 0.011 [0.95] [0.39] –0.033 0.047 [0.20] –0.041 [0.54] –0.171 [0.82] [5] Indirect taxes [0.92] 0.002 –0.001 [0.85] [4.32] 0.041*** –0.035 [1.54] –0.011 [1.10] –0.036 [0.97] [6] Property taxes [0.51] –0.004 –0.005 [0.55] [1.22] 0.064 –0.25 [1.19] 0.075** [2.53] 0.121 [0.97] [7] Trade taxes [1.84] –0.018* –0.002 [0.30] [0.03] –0.001 –0.035 [0.92] –0.006 [0.16] 0.108 [0.88] [8] Social security contributions Table 10.7 Tax sources and political factors, controlling for GDP, unemployment and inflation rate, and other economic variables—country fixed effects, 1990–2005 (excluding Indonesia and hyperinflation years) 232 Profeta, Puglisi, and Scabrosetti 336 Yes Yes Observations Country fixed effects Year fixed effects Yes Yes 227 23 Yes Yes 256 25 0.76 [0.38] –0.04 [1.85] 0.037* [3] Corporate income tax Yes Yes 332 30 0.89 [0.56] –0.061 [1.47] 0.023 [4] Direct taxes Yes Yes 335 30 0.83 [0.72] –0.081 [0.84] –0.008 [5] Indirect taxes Yes Yes 247 23 0.78 [3.19] 0.038*** [0.72] 0.001 [6] Property taxes Yes Yes 329 30 0.7 [0.12] 0.008 [0.14] 0.001 [7] Trade taxes Yes Yes 285 27 0.99 [1.49] –0.072 [2.20] –0.009** [8] Social security contributions GDP per worker is expressed in thousands of PPP dollars Standard errors are clustered at the country level, and the corresponding t statistics are reported in brackets below each coefficient Asterisks denote significance at the 10% (*), 5% (**), and 1% (***) levels 30 Number of countries 0.97 [0.06] [1.02] 0.98 0.003 [0.85] [0.43] –0.146 0.008 [2] Personal income tax 0.008 [1] Tax revenue R2 Agriculture/ GDP Government debt/GDP Dependent variable Table 10.7 (continued) Taxation and Democracy 233 234 Profeta, Puglisi, and Scabrosetti unemployment rate is positively and significantly related with the level of property taxes (tables 10.3 and 10.4) Also in table 10.4 there is a negative and significant correlation between the unemployment rate and personal income taxation and a positive relationship with social security contributions On the other hand, the correlation between the inflation rate and both tax revenue and tax sources is never significant Joint inspection of the regional dummies allows us to conclude that overall tax revenue, personal income, direct and indirect taxation and social security contributions are significantly larger in the (excluded) area of the new EU Countries This is consistent with the previous findings of Profeta and Scabrosetti (2010) Tables 10.5–10.7 present the results for the specification with country fixed effects, in which case we are exploiting solely the within-country correlation of tax sources and our political variables Most of the results displayed in tables 10.2–10.4 not survive this more demanding empirical test In particular, the fixed-effects analysis fails to find any significant and robust relationship between both the level and the structure of taxation and the degree of protection of civil and political rights.14 Thus, even though specific countries in our sample experienced some non-negligible changes in the strength of the democratic institutions and, to a lesser degree, in the level of civil liberties protection, those changes were generally not associated with any significant variation in the structure of taxation Two exceptions are noteworthy The first is a positive and significant relationship between trade taxes and the democracy index, and was discussed above as potentially reflecting the political influence of domestic producers The second result, which appears only in the first specification (table 10.5), is a negative correlation between civil liberties protection and property taxation Following Wintrobe (1990 and 1998), Feld and Frey (2002), and Pommerehne and Weck-Hannemann (1996), one could argue that property taxes require relatively little tax compliance on the part of taxpayers In other words, although property taxes may also involve individual-specific considerations, such as exemptions and differential assessment practices, they are typically less complicated than income taxes Tax allowances, deductions, exemptions, and special cases are all more likely to be used in a context of income taxation The more complicated a tax is, the more it must rely on voluntary compliance by taxpayers Thus, only countries that are able to guarantee a relevant set of civil liberties can rely on citizens’ willingness to cooperate in collecting tax revenue Taxation and Democracy 235 Finally, regarding our macroeconomic controls, it is still the case that there is a positive and significant correlation between the unemployment rate and property taxation Also, we find a negative and significant relationship between the unemployment rate and the share of direct taxes in GDP A reasonable explanation for this pattern is that when the cyclical conditions are poor it may be politically more convenient to rely more heavily on taxation of stocks than on taxation of flows Discussion and Conclusions Many recent studies have emphasized the role of democratic transitions in economic development and growth For example, Papaioannou and Siourounis (2008) show that successful democratic transitions are subsequently associated with a higher growth rate of real per capita income However, little is known about the channel through which democratic transitions affect economic growth Nevertheless, opening this “black box” is crucial to understanding the functioning of political and economic institutions, to discussing policy implications, and to making long-run predictions about the effects of democratization The present chapter is a first attempt in this direction We argue that taxation and redistributive public policies may represent an important link between the introduction of democratic institutions and the economic performances of a given country Accordingly, we explore the role of political variables in shaping taxation systems in developing countries Although several relationships between political variables and tax sources are significant when we run pooled OLS regressions, they are no longer significant when we adopt a more demanding and more reliable specification with country fixed effects The only exceptions involve a positive and significant correlation between the strength of democratic institutions and the share of trade taxes and a negative and mildly significant relationship between the protection of civil liberties and the use of property taxes Another relevant finding—which is robust to country fixed effects— is that a higher unemployment rate is significantly correlated with higher property taxes and lower direct taxes A reasonable explanation for this pattern of results is that during an economic downturn it is politically easier to rely on taxation of stocks than on taxation of flows Generally speaking, our within-country fixed-effects results suggest that the exact channels through which democratization might affect 236 Profeta, Puglisi, and Scabrosetti economic development are still unclear Moreover, our results confirm that the strength of political institutions and the civil liberties indicators may capture two different dimensions of a democracy that we refer as positive and negative liberties, given the opposite directions of the relationships that we found between each of these measures and tax sources More generally, the limited effect of democratization on tax structure in developing countries needs further attention Do differences between developed and developing countries explain the not-uncontroversial results? Is the relationship between democratic transitions and the spending side of the public budget different from that with the revenue side, so that the overall effects on economic performance are difficult to predict? These still-unanswered questions suggest that there is much scope for further research in this area Acknowledgments We thank Clemens Fuest, Giorgia Maffini, and participants in the 2010 CESifo Summer Institute in Venice Notes In a previous paper (Profeta et al 2010), we provide a general account of the relationship between fiscal variables and democratic institutions in developing countries This chapter extends that work by focusing on the taxation side of the public budget To so we enlarge the set of explanatory variables by explicitly accounting for the potential influence of the macroeconomic cycle We also test the robustness of our results by excluding hyperinflation years Aidt et al (2006) find a significant positive relationship between the extension of the voting franchise and the size of government The hypothesis of a nonlinear relationship between democratic indicators and tax revenue is also explored by Profeta et al (2012) See also the classical prediction of Musgrave (1969) We consider the following countries: China, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, the Republic of Korea, Sri Lanka, Thailand, Vietnam, Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, Venezuela, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia Additional details on the political indicators can be found at http://www freedomhouse.org, http:// www.iadb.org/datagob, and http://www.systemicpeace org/inscr/inscr.htm The choice of the political variables is neither easy nor obvious (Munck and Verkuilen 2002; Plümper and Neumayer 2010) Taxation and Democracy 237 For the evolution of the POLITY2 indicator in these countries and some historical notes, see Profeta and Scabrosetti 2010 In some cases we have to reclassify certain taxes to ensure consistency across categories of direct and indirect taxes across different data sources Data on property taxes for new EU members are not available 10 Data on the share of agriculture on GDP for new EU members are not available 11 It would be interesting to include among the set of the control variables a measure of the size of the shadow economy and the level of corruption However, these data are generally available only for few years of the time period investigated in our analysis (Schneider 2007), and they generally show little variation over time 12 Notice that in each table we exclude Indonesia, which appears to be an influential outlier in the analysis This is the country of our sample that experienced the largest (positive) change in the level of democracy, following the demise of the Suharto regime Moreover, following the standard definition of hyperinflation, we exclude for each country the years in which the change in consumer prices exceeded 100% The countries and years excluded are Argentina 1990–1991, Brazil 1990–1994, Nicaragua 1990–1991, Peru 1990–1991, Uruguay 1990–1991, Latvia 1992–1993, Lithuania 1993, and Poland 1990 The results are largely unaffected by these exclusions 13 We thank an anonymous referee for suggesting this alternative explanation 14 Region-specific differences are discussed and investigated in Profeta et al 2010 References Acemoglu, Daron, and James A Robinson 2006 Economic Origins of Dictatorship and Democracy Cambridge University Press Aidt, Toke S., Jayasri Dutta, and Elena Loukoianova 2006 Democracy comes to Europe: Franchise extension and fiscal outcomes 1830–1938 European Economic Review 50 (2):249–283 Aidt, Toke S., and Peter Sandholt Jensen 2007 Tax structure, size of government, and the extension of the voting franchise in Western Europe, 1860–1938 International Tax and Public Finance 16 (3):362–394 Alm, James 1996 Explaining tax compliance In Exploring the Underground Economy: Studies of Illegal and Unreported Activity, ed S Pozo W E Upjohn Institute for Employment Research Berlin, Isaiah 1969 Four Essays on Liberty Oxford University Press Bertrand, Marianne, Esther Duflo, and Sendhil Mullainathan 2004 How much should we trust difference in differences estimates? Quarterly Journal of Economics 119 (1):249–275 Boix, Carles 2003 Democracy and Redistribution Cambridge University Press de Juan, Ana M., Miguel A Lasheras, and Rafaela Mayo 1994 Voluntary tax compliant behavior of Spanish income tax payers Public Finance 49:90–105 Feld, Lars P., and Bruno S Frey 2002 Trust breeds trust: How taxpayers are Treated Economics of Governance (2):87–99 238 Profeta, Puglisi, and Scabrosetti Giavazzi, Francesco, and Guido Tabellini 2005 Economic and political liberalizations Journal of Monetary Economics 52 (7):1297–1330 Kenny, Lawrence W., and Stanley L Winer 2006 Tax systems in the world: An empirical investigation into the importance of tax bases, administration costs, scale and political regime International Tax and Public Finance 13 (2):181–215 Martin, Christian W., and Thomas Plümper 2003 Democracy, government spending, and economic growth: A political-economic explanation of the Barro effect Public Choice 117 (1–2):27–50 Mulligan, Casey B., Ricard Gil, and Xavier Sala-i-Martin 2004 Do democracies have different public policies than nondemocracies? Journal of Economic Perspectives 18 (1):51–74 Munck, Gerardo, and Jay Verkuilen 2002 Conceptualizing and measuring democracy: Evaluating alternative indices Comparative Political Studies 35 (5):5–34 Musgrave, Richard A 1969 Fiscal Systems Yale University Press Papaioannou, Elias, and Greforios Siourounis 2008 Democratization and growth Economic Journal 118 (532):1520–1551 Persson, Torsten, and Guido Tabellini 2007 The Growth Effect of Democracy: Is It Heterogeneous and How Can It Be Estimated? Working Paper 13150, National Bureau of Economic Research Plümper, Thomas, and Eric Neumayer 2010 The level of democracy during interregnum periods: Recoding the Polity2 score Political Analysis 18 (2):206–226 Pommerehne, Werner, and Hannelore Weck-Hannemann 1996 Tax rates, tax administration and income tax evasion in Switzerland Public Choice 88 (1–2):161–170 Profeta, Paola, and Simona Scabrosetti 2010 The Political Economy of Taxation: Lessons from Developing Countries Elgar Profeta, Paola, Riccardo Puglisi, and Simona Scabrosetti 2012 Does Democracy Affect Taxation and Government Spending? Evidence from Developing Countries Journal of Comparative Economics, forthcoming Available at http://www.sciencedirect.com/ science/journal/aip/01475967 Schneider, Friedrich 2007 Shadow economies and corruption all over the world: New estimates for 145 countries Economics: The Open Access Open Assessment E-Journal (9):1–66 Tanzi, Vito, and George Tsibouris 2000 Fiscal Reform Over Ten Years of Transition Working Paper 113, International Monetary Fund Wintrobe, Ronald 1990 The tinpot and the totalitarian: An economic theory of dictatorship American Political Science Review 84 (3):849–872 Wintrobe, Ronald 1998 The Political Economy of Dictatorship Cambridge University Press Contributors Clemens Fuest Oxford University Timothy Goodspeed Hunter College and City University of New York Graduate Center Shafik Hebous Goethe University Michael Keen International Monetary Fund Christian Lessmann Technische Universität Dresden and CESifo Boryana Madzharova Center for Economic Research and Graduate Education—–Economics Institute (CERGE-EI) Giorgia Maffini Oxford University Gunther Markwardt Technische Universität Dresden and CESifo Jorge Martinez-Vazquez Georgia State University and Universidad de Vigo Paola Profeta Università Bocconi Riccardo Puglisi Università di Pavia Nadine Riedel Oxford University Simona Scabrosetti Università di Pavia Johannes Stroebel Stanford University Mirco Tonin University of Southampton, Central European University, and Institute for the Study of Labor (IZA) Arthur van Benthem Stanford University Li Zhang Central University of Finance and Economics George R Zodrow Rice University and Centre for Business Taxation, Oxford University Index Advanced collection schemes, 27, 28 Agricultural taxation, 28, 29 Algeria, 83, 97 Anglophone countries, 16, 17 Anti-poverty programs, 10, 213 Arbitration awards, 94–96 Auditing strategies, 168, 176, 177 foreign direct investment and, 45–61, 65–80 grease theory of, 6, 47, 65, 66, 71, 79 multinationals and, 6, perception index, 68, 78 Costa Rica, 183 Bilateral investment treaties, 7, 45–61, 84–102 Brazil, 109 Bribery, 23, 47, 48, 57–61 Bulgaria, 8, 9, 109, 110, 118–124, 167, 180–184 Business investment, 5, Business taxation, 4, Debt shifting, 146, 147, 155–165 Decentralization, 9, 10, 30 arguments in favor of, 191, 192 disadvantages of, 192, 193 of expenditures, 204–208 foreign aid and, 190–213 of tax revenue, 208–210 Deductions, 70, 234 Defined-benefit schemes, 110, 114, 141, 142 Democracy, 10, 70, 217–236 Developing countries democracy in, 217–236 differences among, 4, 14–19 Direct taxation, 5, 19, 20, 235 Domestic businesses, 145, 234 Capital investment, 65–80 Central and Eastern Europe, 46, 109 Chad, 83 China, 73, 83, 109 Civil liberties, 218–220, 234–236 Colonial histories, 4, 14–17 Compliance issues, 25–27, 32 Corporate income tax corruption and, 5, 6, 45–61, 65–80 foreign direct investment and, 45–61, 65–80 tax avoidance and, 8, tax evasion and, 8, 109–142 Corruption, 3–5 among revenue authorities, 22 competition and, 193 corporate taxation and, 5, 6, 45–61, 65–80 economic development and, Earmarked taxes, 5, 31 Economic development corporate taxation and, 65 democracy and, 217–236 foreign aid and, 189–191 political structure and, 9, 10 taxation and, 13–34, 145 Emerging market countries, 14, 46 Energy Charter Treaty, 93–98, 102 Estonia, 109 Exemptions, 23, 27, 30, 234 Expropriation, 5, 7, 83–92 242 Fiscal federalism, 189–213 Foreign aid, 9, 10, 13 allocation of, 210–212 effectiveness of, 189–191, 195, 196, 205–213 interjurisdictional competition and, 189–213 tax development and, 32, 33 Foreign direct investment, 5, corporate taxation and, 45–61, 65–80 corruption and, 65–80 expropriation and, 85 increase in, 150, 151 investment treaties and, 85, 86 France, 16, 17 Francophone countries, 16, 17 Gabon, 83 Gambia, 15 Good governance, 46–61 “Good policy” hypothesis, 190, 196, 200–204 Government efficiency index, 69, 70, 73 Hungary, 109 Hydrocarbon taxation, 83–102 Income shifting, 3, 8, 9, 124, 125, 145–165 Independent oil companies, 7, 83–102 India, 16 Inflation, 195, 234 Informal sectors, 5, 25–29 Interjurisdictional competition, 9, 10, 189–213 Intra-company loans, 8, 9, 146, 155–165 Italy, 9, 167, 174–180, 183, 184 Labor income, 20, 109, 110 Large-taxpayer offices, 5, 22, 23 Latin America, 10, 21, 109, 219, 223 Micro enterprises, 25, 31, 32 Millennium Development Goals, 13, 189 Multilateral investment treaties, 7, 84, 91–96, 102 Multinational corporations capital investment by, 65–80 corruption and, 6, 7, 45–61, 65–80 profit shifting by, 145–165 tax avoidance by, 8, Index Natural resources, 4, 7, 14, 15, 30 Nigeria, 83 Non-compliance, 25–27 Official Development Assistance, 189, 196 Oil taxation contracts, 83–102 Pakistan, 16, 28, 29 Payroll taxes, 8, 109–142 Personal income tax, 19, 20 in democracies, 218 evasion of, 110 self-declaration for, 112 Political instability, 15, 16, 29, 70 Portugal, 16 Poverty reduction, 13, 145, 213 Presumptive taxes, 9, 29 Profit shifting, 24, 145–165 Progressive taxation, 19, 20 Property taxes, 234, 235 Resource mobilization, 13–16, 19–25, 29–34 Resource taxes, 3, 7, 15, 30 Revenue authorities, 5, 21, 22 Rule of law, 58–61 Small enterprises, 25, 26, 31, 32, 145, 184 Social security taxes, 8, 109–142 State building, taxation and, 5, 29–33 Statutory tax rate, 49, 70 Sub-national governments, 189–213 Taxable income, 111–114, 121–129, 134–141 Tax administration, 21–23, 27, 47, 167, 168, 184 Tax avoidance, 4, 8, 9, 145–165 Tax contracts, 7, 84–102 Tax evasion, 3, 4, 24, 109–142 corporate, 8, 109–142 methods of fighting, 9, 167–184 Tax havens, 9, 24, 46, 146, 147, 152, 158–165 Tax holidays, 45, 61 Tax reform, 3, 23–25 Tax wedge, 125, 126, 132, 133, 138, 139 Underreporting, 9, 109–113, 119, 183 United Nations Commission on International Trade Law, 92 Index Value-added taxes, 5, 15, 16 effectiveness of, 20, 21 geography and, 15, 16 implementation of, 24 logic of, 27 revenue impact of, 17 Wages reported, 8, 129–134 undeclared, 183 underreported, 109–113, 119, 183 Windfall-profit taxes, 7, 83, 97 Withholding taxes, 18, 27, 28, 112 243 ... business investment in developing countries is also investigated in chapter 4, in which Clemens Fuest, Nadine Riedel, and Giorgia Maffini investigate the effects of corruption and corporate taxation. .. Development Again Michael Keen Interest in issues of taxation and development comes and goes This is true of policy makers (in developing countries and, especially, in donor countries) and among civil... Set in Palatino by Toppan Best-set Premedia Limited Printed and bound in the United States of America Library of Congress Cataloging -in- Publication Data Critical issues in taxation and development