The Differential Impact of Democracy on Tax Revenues in Developing and Developed Countries

Abstract

ABSTRACT This paper investigates the extent to which democracy affects tax revenues in developing countries in comparison to developed countries across various categories of tax revenues. Based on a sample consisting of 30 developed and 29 developing countries for 2006–2013, the authors find that while democracy has a positive association with tax revenues in developed countries, the association is generally negative for developing countries compared to their counterparts. This study finds that the tax revenues most negatively affected by democracy in developing countries are corporate. The positive findings for developed countries support predictions of the compatibility perspective: that democracy results in economic growth. For developing countries, the relationship is either negative or weaker, matching the predictions of the conflict perspective that democracy results in various groups increasing rent-seeking activities from the state. These findings have implications for tax-related public policies.