An Analysis of the Relationship Between Taxation and Democracy: The Example of European Union Member and Candidate Countries (2010-2020)Yücel Demirkılıç, Fazlı Yıldız, Ersin Nail Sağdıç
The aim of this study is to examine the causal relationship between the level of democratization and tax revenues in the period of 2010- 2020 in 33 European Union (EU) member and candidate countries. The causal relationships between the variables were tested with the Emirmahmutoğlu-Köse (2011) panel causality test based on the Toda–Yamamoto (1995) test. According to the results of the analysis, bidirectional causal relationships were determined between the level of democratization and tax revenues based on the relevant countries and period throughout the panel. When evaluating the country-based causality results, one-way causal relationships from democratization level to tax revenues were found in Albania, Greece, Ireland, Moldova and North Macedonia; one-way causality from tax revenues to democratization level was found in Croatia, Cyprus, Lithuania, Luxembourg, Malta, Romania, and Slovenia; and bidirectional causal relationships were found between the level of democratization and tax revenues in Poland and Ukraine. In addition, no causal relationships were found between tax revenues and the level of democratization in Austria, Belgium, Bulgaria, Czechia, Denmark, Estonia, Finland, France, Germany, Hungary, Italy, Latvia, Netherlands, Portugal, Spain, Slovakia, Sweden, Serbia, or Türkiye. The empirical findings of the study indicate the causal relationship between the level of democratization and tax revenues to differ due to such things as the political, economic, social, and institutional characteristics of the countries.
Vergilendirme ve Demokrasi İlişkisinin Analizi: Avrupa Birliğine Üye ve Aday Ülkeler Örneği (2010-2020)Yücel Demirkılıç, Fazlı Yıldız, Ersin Nail Sağdıç
Bu çalışmanın amacı, Avrupa Birliğine (AB) üye ve aday 33 ülkede 2010-2020 döneminde demokratikleşme düzeyi ile vergi gelirleri arasındaki nedensel ilişkiyi incelemektir. Değişkenler arasındaki nedensellik ilişkisi Toda–Yamamoto (1995) testine dayanan Emirmahmutoğlu-Köse (2011) panel nedensellik testi ile sınanmıştır. Analiz sonuçlarına göre, panel genelinde ilgili ülke ve dönem temelinde demokratikleşme düzeyi ve vergi gelirleri arasında çift yönlü nedensellik ilişkisi tespit edilmiştir. Ülke bazlı nedensellik sonuçları değerlendirildiğinde, Arnavutluk, Yunanistan, İrlanda, Moldova ve Kuzey Makedonya’da demokratikleşme düzeyinden vergi gelirlerine doğru tek yönlü nedensellik ilişkisi, tam aksine Hırvatistan, Kıbrıs, Litvanya, Lüksemburg, Malta, Romanya ve Slovenya’da ise vergi gelirlerinden demokratikleşme düzeyine doğru tek yönlü nedensellik ilişkisi, Polonya ve Ukrayna’da ise demokratikleşme düzeyi ve vergi gelirleri arasında çift yönlü nedensellik ilişkisi tespit edilmiştir. Ayrıca, Avusturya, Belçika, Bulgaristan, Çekya, Danimarka, Estonya, Finlandiya, Fransa, Almanya, Macaristan, İtalya, Letonya, Hollanda, Portekiz, İspanya, Slovakya, İsveç, Sırbistan ve Türkiye’de ise vergi gelirleri ile demokratikleşme düzeyi arasında herhangi bir nedensellik ilişkisi bulunmamıştır. Araştırmanın ampirik bulguları ülkelerin siyasal, ekonomik, sosyal, kurumsal vb. özelliklerinden kaynaklı olarak demokratikleşme düzeyi ile vergi gelirleri arasındaki nedensellik ilişkisinin farklılaştığına işaret etmektedir.
States have the right to sovereignty over the lands within their borders. States collect taxes based on this sovereign right. State sovereignty is related to the taxes a state is able to collect. In today’s democracies, taxation authority is accepted as a legal right of states. In the past, however, no compromise regarding taxation was able to be reached between those with taxation authority and the people bearing the tax burden. While the ruling segment aimed to increase tax revenues, the ruled objected to arbitrary taxation. As a result of these types of revolts, absolute monarchic rule had been overthrown, with taxation authority being gradually taken away from monarchs and kings and passed to parliaments. As a result, these initiatives not only limited taxation authority but also contributed to democracy.
The increases in the level of taxation experienced throughout history increased the costs citizens had to bear. For this reason, citizens started to control how governments spend their
tax revenues by participating in the bargaining process. In line with this, governments have had to make more disclosures to their citizens about expenditures. Thus, governments have
gained a democratic structure by adopting a more transparent structure. Another approach that examines the relationship between taxation and democracy from a similar perspective is rentier state theory. According to this theory, democracy is weak in states that derive most of their income from inefficient fields such as oil and natural gas. As a matter of fact, due to the low level of taxation, bargaining between citizens and governments remains weak, thus weakening democracy as well. The relationship between the level of taxation and democracyis not limited to the existence of a causal relationship from taxation to democracy. In addition, there are opinions that there is a casual relationship from democracy to taxation. According to this view, society can clearly monitor the economic activities in transparent and accountable states. This situation improves the harmony between the state and the individual and increases the taxation capacity.
When examining the empirical literature on the causal relationship between the levels of taxation and democracy, studies are found to have revealed different results. In the literature,
a one-way causal relationship has mainly been determined from the level of democratization to tax revenues. However, a substantial number of studies are also found to have revealed a
one-way causal relationship from tax revenues to the level of democratization. Apart from these results, studies are also found to have detected bidirectional causality between these two variables, as well as studies that revealed no relationship to be present.
This study aims to examine the causal relationship between tax revenues and the level of democratization in a total of 33 countries, including 27 member states of the European
Union (Austria, Belgium, Bulgaria, Finland, Cyprus, Czechia, Germany, Estonia, Finland, France, Greece, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Italy, Poland,
Poland, Romania, Slovakia, Slovenia, Spain, Sweden) and six candidate countries (Albania, Moldova, North Macedonia, Serbia, Türkiye, and Ukraine) over the 2010-2020 period. This relationship was examined using the panel data analysis method. The study uses the panel causality test developed by Emirmahmutoğlu and Köse (2011) based on the Toda-Yamamoto (1995) test as its method. As for data, the Democracy Index (DI) data, which shows the level of democratization, comes from the Economist Intelligence Unit (EIU, 2022), and the data
on tax revenues over gross domestic product, which defines the taxation level (TR) comes from the World Bank’s (2022) World Development Indicators and the Organization for Economic Co-operation and Development (OECD, 2022) Data Tax Revenue databases.
According to the analysis results, bidirectional causal relationships were found between the level of democratization and tax revenues in the context of the relevant period and countries throughout the panel. When analyzing the results in terms of countries, one-way causal relationships from democratization level to tax revenues were identified in Albania, Greece, Ireland, Moldova and North Macedonia. On the other hand, the countries where one-way causal relationships from tax revenues to the level of democratization were found are Croatia, Cyprus, Lithuania, Luxembourg, Malta, Romania, and Slovenia. In addition to all these results, bidirectional causal relationships were found between the level of democratization and tax revenues in Poland and Ukraine. No causal relationships were found between taxes and democracy in Austria, Belgium, Bulgaria, Czechia, Denmark, Estonia, Finland, France, Germany, Hungary, Italy, Latvia, Netherlands, Portugal, Spain, Slovakia, Sweden, Serbia, or Türkiye. The empirical findings of the study show the causal relationship between the level of democratization and tax revenues to differ according to country, and these differences may arise from such things as the social, economic, political, and institutional characteristics of the countries.