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.
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Notes
The author is grateful to Professor Masayuki Tamaoka for the insightful questions and contributions that led to the formation of this expression.
In determining the influence of the tax structure on political instability, the computation of the tax obligation ex ante or tax payments ex post raises an important question. Following Hettich and Winer's [19] description of taxation as a “loss” in income, and the argument presented concerning the ability or otherwise of the individual to compute the tax ex ante or ex post, it is pertinent, then, to question whether the loss is felt by the individual prior to the payment (ex ante), at the point of payment, or after the payment (ex post). If, for example, the individual could accurately estimate his tax obligations ex ante, would the individual then feel a loss of yet-to-be-made tax payments from possibly yet-to-be-earned income, as opposed to the point of payment or after the payment has been made? This research is unable to provide answers to such questions as this.
There are no cyclically adjusted data in our database. The original data is thus used.
External conflict is not included in this research because the impact of such type of conflict on the relationship between external conflict and the tax structure, as well as, performance of the domestic economy may not be clearly ascertained.
This measure of political instability implies an equal weight of 50:50 being applied to the frequency of government change in a year and the number of conflict months in a year, respectively. Ratios of 60:40 and 40:60 produced largely similar results in preliminary testing, although the estimated parameter values were greater and more statistically significant with a higher coefficient of determination (\({r^2}\)) and greater statistical significance of the f-statistic for the model used when the greater weight was applied to the number of conflict months (that is, 40:60) than the contrary (that is, 60:40).
The basic econometric model in Eq. 7 is modified by disentangling the measure of political instability into its constituent parts, that is, frequency of government change (\({\text{FGC}}\)) and internal conflict months (\({\text{ICM}}\)), resulting in the model \({\text{FGC}}_{{it}} = \alpha _{i} + \gamma _{1} {\text{FGC}}_{{it - 1}} + \gamma _{2} \left( {\frac{{{\text{DT}}}}{{{\text{IT}}}}} \right)_{{it}} + \gamma _{3} \left( {\frac{{\pi H}}{Y}} \right)_{{it}} + \gamma _{4} {\text{GDPpc}}_{{it}} + \gamma _{5} {\text{Urban}}_{{it}} + \gamma _{6} {\text{CAB}}_{{it}} + \varepsilon _{{it}}\) and \({\text{ICM}}_{{it}} = \alpha _{i} + \gamma _{1} {\text{ICM}}_{{it - 1}} + \gamma _{2} \left( {\frac{{{\text{DT}}}}{{{\text{IT}}}}} \right)_{{it}} + \gamma _{3} \left( {\frac{{\pi H}}{Y}} \right)_{{it}} + \gamma _{4} {\text{GDPpc}}_{{it}} + \gamma _{5} {\text{Urban}}_{{it}} + \gamma _{6} {\text{CAB}}_{{it}} + \varepsilon _{{it}}\), respectively. The results of these analyses are shown in Table 8 in “Appendix”. The \({\text{FGC}}\) has a significant direct relationship with the \({\text{DITR}}\) for all the countries, while the \({\text{ICM}}\) does not (and, therefore, not shown). The \({\text{ICM}}\), however, has a significant inverse relationship with \({\text{DITR}}\) in the countries where the average \({\text{DITR}}\) was less than 5:10 up to those with a ratio of less than 8:10. This relationship reverses to a significantly positive one for countries where the average \({\text{DITR}}\) was greater than or equal to 8:10 and 9:10. This indicates that raising the direct tax lowers the risk of conflict in countries where the average \({\text{DITR}}\) are low, while raising the risk of conflict in countries where the average \({\text{DITR}}\) is high.
The basic econometric models in Eqs. 7 and 8 are modified such that direct tax and indirect tax are treated as separate variables rather than as a ratio, resulting in the model \({\text{PI}_{it}} = {\alpha_i} + {\gamma_1}{\text{PI}_{it - 1}} + {\gamma_2}{\text{DT}_{it}} + {\gamma_3}{\text{IT}_{it}} + {\gamma_4}{\left( {\frac{\pi H}{Y}} \right)_{it}} + {\gamma_5}{\text{GDPpc}_{it}} + {\gamma_6}{\text{Urban}_{it}} + {\gamma_7}{\text{CA}}{{\text{B}}_{it}} + {\varepsilon_{it}}\) and \({\text{P}}{{\text{S}}_{it}} = {\alpha_i} + {\gamma_1}{\text{P}}{{\text{S}}_{it - 1}} + {\gamma_2}{\text{D}}{{\text{T}}_{it}} + {\gamma_3}{\text{I}}{{\text{T}}_{it}} + {\gamma_4}{\left( {\frac{\pi H}{Y}} \right)_{it}} + {\gamma_5}{\text{GDPp}}{{\text{c}}_{it}} + {\gamma_6}{\text{Urba}}{{\text{n}}_{it}} + {\gamma_7}{\text{CA}}{{\text{B}}_{it}} + {\varepsilon_{it}}\), respectively. The results of these analyses are shown in Tables 8 and 9 in “Appendix”, respectively. In Table 9 in “Appendix”, direct tax lowers the level of political instability in analyses that included all the countries and also in those countries where the average \({\text{DITR}}\) are low. However, in countries where the average \({\text{DITR}}\) is high, direct tax raises the level of political instability. Similar to the analysis in Table 9 in “Appendix”, where all the countries are analysed, the analysis in Table 10 in “Appendix”, which uses the WGI \({\text{PSE}}\), indicates that direct tax lowers the level of political instability (that is, raises the level of political stability) for all the countries. Indirect tax on the other hand lowers the level of political stability when the average \({\text{DITR}}\) is low, and raises the level of political stability when the average \({\text{DITR}}\) is high. In summary, direct tax lowers the level of political instability when all the countries are analysed as a group, but raises the level of political instability when the average \({\text{DITR}}\) is high. The contrary is true for indirect tax, with regard to the average \({\text{DITR}}\).
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Acknowledgements
I am grateful to Professor Masayuki Tamaoka and Professor Tomomi Miyazaki for providing invaluable guidance during the research. I am also grateful to Professor Keijiro Otsuka, Professor Yoshikatsu Tatamitani and Professor Shigeharu Okajima for reviewing the work and offering suggestions that have been very helpful in improving the work. I am also grateful to Professor Hiroo Harada and Professor Masao Tsuri, as well as, the other participants at the 17th International Conference of the Japan Economic Policy Association in Kanagawa, Japan who made very helpful suggestions that improved the quality of this paper. The very helpful comments of two anonymous referees are acknowledged and deeply appreciated.
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The author was a recipient of Japan’s Ministry of Education, Culture, Sports, Science, and Technology (MEXT) scholarship while writing this paper.
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This paper forms part of the author’s doctoral dissertation on the topic “Economic analysis of political instability in Africa” at Kobe University, Japan.
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Dalyop, G.T. Tax structure and political instability in Africa. IJEPS 14, 77–121 (2020). https://doi.org/10.1007/s42495-019-00024-y
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DOI: https://doi.org/10.1007/s42495-019-00024-y