Analyzing The Relationship Between Factor Price Manipulation And Bureaucratic Corruption: Insights From A State Capacity Perspective
Dr. Ying-Jie Lin
Department of Economics, National Chengchi University, Taiwan
Abstract
The conventional wisdom suggests that a prudent fiscal stance accompanied by low taxes should foster economic growth. However, empirical evidence reveals a paradox: tax revenue-to-GDP ratios tend to be higher in developed countries compared to less developed ones. This inconsistency between theory and observation can be illuminated through the lens of North's insight, which underscores the influence of political structures on tax regimes and economic welfare.
North (1981) argued that political systems may prioritize maximizing returns for rulers or elite groups rather than promoting efficiency and social welfare. Such a perspective leads us to question not whether high taxes stimulate growth, but whether the political regime is extractive or inclusive. In many less developed countries (LDCs), economic stagnation and low tax revenues can be attributed to the extraction practices of corrupt governing elites.
This article extends North's framework by categorizing LDCs into two groups: weak states and strong states. Weak states are characterized by their limited capacity to levy taxes effectively, often hindered by resistance from local power brokers. These governments struggle to govern effectively, leading to economic failures related to a lack of tax collection, public goods provision, and incentives for sound economic behavior. Even in cases of low taxes, the absence of strong governance hampers economic progress