Tax is Power
What is your favorite thing about tax? Is it filling out your tax return, the opportunity to do a little arithmetic? Is it the potential for scintillating dinner party conversation about the best way to reduce the deficit? Is it the way it makes the Tea Party movement really, really angry? Or maybe you’re one of those liberal softies who likes the welfare and education programs it pays for?
I’ll tell you my favorite thing about tax: power.
Paying tax inevitably creates expectations. To be given poor service by a public employee is an affront. “My taxes pay for your wages!” I grumble to myself as I am forced to wait half an hour to queue for my parking permit. Luckily, because I pay taxes I have a voice. I can demand that things get better. And most governments listen. The government needs us to run the country. In return for us giving them our taxes we get to hold the government accountable; if they don’t give us what we want we’ll vote them out of power or we’ll move, taking our taxes elsewhere.
England’s parliament evolved as medieval kings needed to raise money for increasingly costly wars abroad. They needed to tax the barons and so in return, they involved the barons in decisions about how the country was run. The cost of not involving taxpayers in decisions is high. Remember the Boston tea party in 1773? In Ghana in 1995 protests against the sudden imposition of a value-added tax quickly spread to demands for greater democracy, a stronger rule of law and improved service provision[EB2] . Taxation has long been a catalyst for citizens to challenge ruling elites.
In post-conflict and fragile states tax systems are often very weak. So is the ability of citizens to affect policy. PDT sees this particularly clearly with the entrepreneurs it works with. Small and medium-sized enterprises (SMEs) exist largely in the informal sector, unregistered and not paying tax. This is not where they want to be. Max Everest-Phillips reports on a DfID-funded survey showing that in Sierra Leone 60 percent of firms believed that formalization would, in principle, help their enterprises to grow. Liberian firms emphasized a desire to avoid corruption and abuse by local officials as an incentive to formalize; however, over 40 percent of medium-sized enterprises had tried to formalize but had then given up due to complicated procedures and bureaucratic costs. 
These SMEs struggle to grow as they confront endless challenges: poor electricity, inefficient transport, weak infrastructure and low access to credit, just to name a few. By contrast, large corporations (who pay large taxes) are given significant incentives and benefits and receive better services from the government. Such as?
Donors have a role to play in increasing the bargaining power of these SMEs. By procuring locally donors can increase the incentives for businesses to formalize. Then, not only will profits be going to local businesses and stimulating the economy, but some of those profits will also go to the government in taxes and increase the bargaining power of these businesses.
The tea-partiers were right; there should be no taxation without representation. But the other side to that is that there is likely to be no representation without taxation. Tax is power.