How Foreign Aid Compromises Taxation

Think of of the relationship between governments and their people as a relationship of buyers and sellers, or producers and consumers. In this relationship, governments are producers, and the people are consumers. Governments provide a good – health care, infrastructure, municipal services, etc. In developed nations, these goods are paid for in the form of taxes. Governments have the incentive to provide good services because that means they can collect more taxes. They also have an incentive to build infrastructure and strengthen civil society because that gives them a more efficient means of actually collecting those taxes. This not only means building roads and railroads, but it also means establishing local governments that can collect taxes and see to the needs of local populations. This co-dependency between the government and the population is key. The government relies on the people to pay taxes so that it will have money in their coffers that they can spend in various ways. Therefore, they must provide services that the people will be willing to pay for. This also means that the people, as taxpayers, have leverage that they can use to influence the government to act in ways that protect the best interests of the people. If the people don’t pay taxes, the government will stop providing services; which the people can’t afford. If the government stops providing services, they will have no way of collecting taxes, nor will the people have the means to pay them. Both sides are held accountable by their own needs. Better services means more money in the working class which means a stronger tax base which means more incentive for governments to act in a way that pleases taxpayers. It’s not an issue of benevolence or corruption, it’s an issue of economics.

Pouring aid directly into the coffers of governments entirely removes that incentive to provide good services, which cripples the tax base and prevents growth and strengthening of nations, regardless of whether or not the government is corrupt. Governments do not need to provide services because their coffers will be filled with or without a taxpaying public. This means that the people have no leverage and therefore no ability to pressure their governments to act responsibly. It means that governments do not need to build roads and railroads, nor do they need to establish local branches of government, which means the public has virtually no voice in the government. In many parts of the world, local populations, particularly in rural areas, have no interaction with their governments at all.

This is not in defense of Dambisa Moyo in particular, in fact it may speak more to the points made by William Easterly or even Paul Collier (although I don’t think a trust plays much of a role here, as given the right incentives, both sides acting in their own best interests will be mutually beneficial), as aid may still be effective if put into the hands of civil leaders rather than governments. However it does provide avery simplified look at one way in which aid given directly to governments may actually cripple the nations it is intended to help, and prevent them from ever establishing self-sufficient economies and civil societies.

- Jeremy Harding