Does Paying Taxes Improve the Quality of Governance? Cross-Country Evidence

Abstract

A growing economics literature argues that taxation can strengthen the quality of governance and public sector institutions by making governments more responsive and accountable to their citizens, building capacity, and improving public policy. In this paper, we provide empirical support for this view. Using data on a cross-section of developed and developing countries, we find that taxation improves the quality of governance and that those taxes that are borne most directly by citizens are the most important in improving governance. Our results are robust to different estimation methodologies, to variations in the country sample, and to controlling for the influence of variables that have been identified as affecting the quality of governance. The results suggest that policies aimed at mobilizing tax revenues may be justified based on the greater accountability of government that may result.

Keywords: Cross-section, taxation, governance, development, state capacity

JEL Classification: C31, H11, H20, O11