How Does Taxation Affect the Quality of Governance

TLDR

Governments that rely on tax revenue tend to be more accountable and capable, whereas those that are not tax‑dependent risk arbitrary rule and weak institutions, though coercive tax collection can strain citizen relations. Practical measures to improve the tax–citizen relationship can enhance governance quality.

Abstract

There are clear connections between how states obtain revenue, and the quality of their governance. If governments are not dependent on taxes for their fi nance, they are less accountable and responsive to citizen taxpayers, and have little incentive to build political and organisational capacity to negotiate and collect revenue and spend it effectively. The likely outcome is arbitrary governance and weak states. However, tax dependence does not necessarily guarantee better governance. Taxes may be collected coercively. This may poison relations between government and citizens. The good news is that there are some very practical ways of improving the tax relationship that could contribute to better governance.