Evidence shows that low-income countries collect significantly fewer taxes on their Gross Domestic Product (GDP) than high-income countries. In their article “Why Do Develop Countries Tax So Little?”, Besley and Persson try to find the reason for the matter by introducing a baseline model that aims at explaining the forces that influence taxation decisions and capabilities. The present paper offers a response to the article by discussing the major strengths and weaknesses of the arguments provided in the article and describing the implications of the findings.
The central question discussed in the reviewed article can be found in its title. The authors provide a systematic analysis of economic, political, social, and cultural behaviors to answer the question of why the taxation level in developing countries is low in comparison with developed economies. The authors argue that the central economic reasons for the matter are the ubiquity of informal and small-scale firms, international aid and resource dependence, and failure to modify the tax system by governments (Besley and Persson 109-112).
At the same time, weak institutions, fragmented polities, absence of transparency, weak sense of national identity, and a poor norm for compliance also determine the poor tax collection culture (Besley and Persson 113-117). The researchers justify their position using analytical reasoning, statistical analysis, and the opinions of experts.
The central strength of the argument is the holistic approach to the discussed question. The authors acknowledge that countries’ economies are influenced not by economic factors, but also by political and socio-cultural aspects. The provided baseline model considers the major characteristics of developing countries and draws direct and indirect links between the maturity of systems and taxation level. The evidence behind the claims is substantial, which implies that the strength of the argument and reliability of findings are high. Moreover, the model is applicable not only to developing countries; instead, it can be used to explain the reasons behind taxation patterns of all nations.
Despite having some distinct strengths, there are some weaknesses of the argument that should be acknowledged. As all baseline models, the findings cannot be applied directly to many real-world situations. In other words, while the tendencies described in the article are accurate on average, the financial performances of countries may differ considerably. For instance, the residuals in the linear regression model of the share of income taxes in revenue against the size of the formal economy are dispersed considerably, which implies a high margin of error. Therefore, economists can use the model only as a starting point for policymaking. In other words, before translating the model to practice, additional research should be conducted using the insights provided by Besley and Persson in the article.
When applying the baseline model, a policymaker should want to gain specific knowledge about the country of interest. The research should be based on up-to-date data to discover if the factors discussed by Besley and Persson have the same influence on the country’s economy and taxation patterns. The knowledge gained from the article can be used for creating hypotheses and borrowing methods for testing these hypotheses. After additional research is conducted, I would use the findings to determine the strengths and weaknesses of a reviewed economy and identify the most efficient places for interventions. These interventions would aim at increasing the amount of taxes collected in relation to GDP by addressing the problems in political, economic, cultural, and social spheres.
Works Cited
Besley, T. and Torsten Persson. “Why Do Developing Countries Tax So Little?” Journal of Economic Perspectives, vol. 28, no. 4, 2014, pp. 99-120.