Does Regressive Taxation without Democratic Accountability Contribute to Human Development? The Effect of Recent Trends in State Revenue Production in Developing Countries

Abstract

State revenue production since the third wave of democratization contrasts sharply with the experiences of the first and second waves of democratization. The later democratizers tend to adopt and raise revenue from a regressive tax on consumption (the value-added tax: VAT), which is more compatible with economic development in global markets. How does the weak redistributive effect of this form of taxation affect the welfare of people? Previous studies argue that democratic accountability through multiparty contestation improves human development. Focused on taxation, we argue that an increasing state financial capacity contributes to an increase in human development even without electoral contestation. Empirical analyses specifically examine the effect of the VAT on infant mortality. The results demonstrate that although state revenue production relies on a regressive form of taxation, taxation contributes to human development in countries with less democratic accountability. The state's capacity to gain tax compliance intervenes critically in such development. Moreover, the increasing capacity to finance the state goes hand-in-hand with democratization and thus further promotes human development in newly emerging democratic states.