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Factors Taxation and the Governance Dividend

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Title: Factors Taxation and the Governance Dividend
Speaker: Antonio Savoia (University of Manchester, UK)

We are pleased to announce the 3rd Seminar Series on Governance, Institutions, and Sustainability jointly hosted by the Centre for Political Economy and Institutional Studies and by the Birkbeck Responsible Business Centre, within the Birkbeck Business School.   

In our rapidly evolving world, the intricate web connecting governance, institutions, and sustainability has become increasingly prominent. We invite scholars, researchers, and practitioners to enhance this very important debate and to join us in exploring the profound intertwining of these critical elements at our upcoming seminar series.

 

Abstract 

An influential literature suggests that the rise of taxation should come with a ‘governance dividend’: the quality of government should improve, because the taxpaying citizenry will subject the ruler to increased scrutiny. While this fits the history of nowadays advanced economies, it is less clear whether a governance dividend can materialise in less developed economies and, above all, which taxes are more likely to produce it. This paper contributes to address this lacuna by investigating whether factor income taxation may affect governance quality in Low- and Middle-income countries, using panel data for 102 countries from 1965 to 2018, new measures of effective tax rates on capital and labour, and four key governance dimensions: Electoral Democracy, Vertical Accountability, Egalitarian Democracy, and Rule of Law. Our baseline estimates suggest a generalised positive association between capital income taxation and governance. By contrast, the association between labour income taxation and governance appears concentrated on Egalitarian Democracy. To address endogeneity, we implement an instrumental variables strategy based on shift-share instruments. IV estimates suggests that capital taxation has a positive causal effect on the Rule of Law, with no clear effect on other dimensions of governance. Instead, labour income taxation exerts a positive effect on Egalitarian Democracy. These findings are consistent with the view that the nature of the fiscal contract may be different for capital and labour owners, and they suggest that designing tax systems may also lead countries to different paths of political and institutional development, depending on which factor of production one chooses to tax.

 

Speaker

Antonio Savoia (University of Manchester, UK and UNU-WIDER)

 

This work is in collaboration with Tania Masi (G. d’Annunzio University of Chieti-Pescara) and Kunal Sen (UNU-WIDER and University of Manchester). 

 

Convener/Organiser: Dr Luca Andriani 

 

 

Contact name: Luca Andriani

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