Tax structure and political instability in Africa

Abstract

Raising taxes to finance the business of government has the potential for causing disaffection among taxpayers or act as a catalyst for the expression of discontent regarding the existing economic conditions and/or general disaffection with governance. Using data from 52 African countries for the period 1980–2013, the relationship between the tax structure and political instability is analysed. The analysis proposes that higher direct taxation relative to indirect taxation generates a greater feeling of loss in the taxpayer and hence creates conditions for greater political instability. The larger per transaction payments of direct taxes and their relatively simplified structures raise the perceived cost of government services and, therefore, have greater potential in generating disaffection in the taxpayer than indirect taxes, which are smaller per transaction payments and are much more complex, and, therefore, less discernible. The analysis finds that higher long-term (1980–2013) average direct tax–indirect tax ratios ($${\text{DITR}}$$), as well as, wider fluctuations in the successive values of the direct tax when combined with higher long-term average $${\text{DITR}}$$, result in a direct relationship between the $${\text{DITR}}$$ and political instability. The same relationship is also found when the fluctuations in direct tax are very wide and are wider than the fluctuations in indirect tax, irrespective of the value of the long-term average $${\text{DITR}}$$. On the contra side, for countries with a lower long-term average $${\text{DITR}}$$, increasing direct taxation relative to indirect taxation lowers the level of political instability. The same relationship holds when there are smaller fluctuations in the direct tax.