This report is cross-posted from the Transparency and Accountability Initiative (T/AI) website.


We often believe that citizens who pay taxes to the government should have a stronger desire to make sure that the government spends their money wisely. According to this idea of a “fiscal contract,” citizens who pay taxes expect accountable and democratic governments that deliver public goods. In this evidence review, we seek to answer two questions. First, does such a fiscal contract exist between citizens and governments in developing countries? Second, assuming that  such a fiscal contract exists or can be created, how can governments increase taxation and decrease tax evasion? To answer these questions, we review and discuss recent evidence from empirical studies published between 2010 and 2016. Our main findings are as follows:

Question 1: Do citizens who pay taxes to the government expect, and take action to pressure their governments, for more accountability, democratic representation, and public goods provision?

To answer this question, we would ideally look directly at individual-level data on citizen expectations and actions. We found only six studies with these data (Broms 2015a, Paler 2013, Bratton 2011, McGuirk 2013, Martin 2016, and de la Cuesta et al. 2015). In short, we need far more empirical studies before it is possible to draw any conclusions about whether  taxation makes citizens in developing contexts or in particular kinds of countries more likely to expect better governmental performance and hold governments accountable.

Based on the six studies we found with these data, there is little evidence that taxation generally leads to differences in citizen attitudes or behavior towards government in a range of countries. Out of the four studies that assessed this question cross-nationally, three concluded that there was no relationship (Bratton, McGuirk, de la Cuesta et al.). Two studies (Paler 2013, Martin 2016) examined the relationship between taxation and citizen attitudes and behavior within particular countries (Indonesia and Uganda, respectively). For these countries, taxation did seem to lead to higher citizen engagement and demands for accountability. So while there may be no global relationship, taxation may lead to citizen action in particular countries.

Other studies did not look specifically at the impact of taxation on citizen behavior but sought to detect the existence of a fiscal contract more indirectly. Several well-designed studies from Latin America suggested that local governments with more tax revenue have better public goods provision. More non-tax revenue, in contrast, was not associated with better public goods provision, suggesting that better public goods provision was not simply a result of more resources. Instead, local governments, for some reason, feel more compelled to provide public goods when their revenues are from taxes.

Finally, a third category of studies relying on cross-national analyses identify patterns that may be consistent with fiscal contract theory, but these findings are far more conjectural. Studies in this category typically found that countries with more tax revenue (as a share of GDP) were also more likely to score more highly on composite indices of governance,  bureaucratic quality, and democracy. While potentially consistent with the existence of a fiscal contract, it remains uncertain whether taxation leads to better governance and more democracy – or whether countries with better governance and more democracy are better able to collect taxes from their citizens.

Question 2: Assuming that such a fiscal contract exists or can be created, how can governments increase taxation and decrease tax evasion?

Recent empirical work focuses on five potential answers: (1) government provision of public goods (fiscal contract theory itself); (2) government audits and punishment (economic deterrence); (3) social norms; (4) comparative treatment; (5) political legitimacy.

Evidence is strongest as well as most plentiful for the first two answers – government provision of public goods and the threat of punishment. For the remaining possibilities, evidence is weaker.

The review is organized as follows. Section II outlines the protocol we used to identify recent research papers on these questions. Section III summarizes the findings of our evidence review. Section IV assesses the quality of this evidence, highlighting some important problems that future research should overcome.

This evidence brief is part of the Learning from Evidence series, a learning process undertaken by the Transparency and Accountability Initiative to engage with and utilize the evolving evidence base in support of our members’ transparency and accountable governance goals. We are pleased to have partnered with MIT’s Governance Lab and Twaweza on this initiative. This series comprises a variety of practice- and policy-relevant learning products for funders and practitioners alike, from evidence briefs, to more detailed evidence syntheses, to tools to support the navigation of evidence in context.