Human development without democratic accountability: how regressive taxation contributes to human development through state capacity

Abstract

AbstractState revenue production since the third wave of democratization contrasts sharply with the experiences of the first and second waves of democratization. The late democratizers tend to adopt and raise revenue from a regressive tax on consumption (the value-added tax: VAT), which is more compatible with economic development in global markets but is considered as unequal taxation. How does the weak redistributive (i.e., regressive) effect of this form of taxation affect the welfare of people? We build on the conventional wisdom that democratic accountability through multiparty contestation improves human development. Focused on taxation, we argue that an increasing state financial capacity contributes to an increase in human development, even when electoral contestation is absent. Empirical analyses employed a reduction in infant mortality as an indicator for the improvement of human development and demonstrate the counter-intuitive effect of the VAT on human development. Despite the effect of weak redistribution, the VAT contributes to human development in countries with less democratic accountability. The results also show that the state's financial capacity to secure tax compliance, rather than a mere increase in tax revenue, intervenes critically in such development in countries since the third wave. We conclude that the increased state financial capacity with regressive taxation is expected to promote human development in newly emerging democratic states.