Want to get rich? Pay taxes

June 23rd, 2014

Oliver Wendell Holmes Jr. once said, “I like to pay taxes. With them, I buy civilization.” He might well have said development. Regions that have experienced the fastest growth in the last fifty years have also had a tax base they could use to invest in the infrastructure of growth – roads, schools, and health. While some have argued that taxes impede growth, the long-term picture doesn’t sit well with that theory.

Take a look at this great new chart of tax revenues around the world since 1960 by Thomas Flores and Irfan Nooruddin:


Source: Research to appear in forthcoming book Electing Democracy 

The overall picture is that tax revenues have plunged in nearly every region outside of Western Europe and North America. And it just so happens there’s a strong link between taxation and development, but it’s not what you might think. Countries that collect more taxes also tend to experience stronger economic development.

Incidentally, that’s why there’s been so much talk centered around one three-word phrase: domestic resource mobilization. The experts are gearing up to replace the Millennium Development Goals which expire in 2015, and holding a big financing for development conference to pay for them. Negotiators are hoping that increasing tax revenue will help people lift themselves out of poverty.”

Africa, Latin America, and Eastern Europe—regions marred with slower growth or decline since 1960— have also seen lower tax revenues. African countries collect an average of 26% of their GDP in taxes, and the poorest African countries average just 17%. This picture is consistent around the globe: twenty of the world’s poorest countries collect less than 15% of their GDP in taxes. By contrast, the wealthier OECD nations average a tax rate of about 35% of GDP.

In the last 30 years, African economies lost around a trillion dollars in net resource transfers out of the continent. It’s heartbreaking to think about how many roads, schools and clinics that weren’t built or weren’t properly resourced because of that missing cash.

There is no one key to development success. But it certainly couldn’t hurt to plug the leaks in the financial system that allow criminals, tax evading corporations, and corrupt politicians to steal from ordinary citizens. I, for one, would like to find out what African countries could do for their citizens with a trillion more dollars.

Written by Porter McConnell

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