How taxation can help build a social contract

The crucial role of taxation in development, as a means to improve governance through a social contract, has long been established. The key idea is that it binds the citizenry with the political elite into a virtuous circle of rights and obligations. Oil-rich countries have, however, frequently fallen out of this equation. It is very well explained by Professor Tim Besley on a recent episode of the VoxDev podcast: “Oil rich states do not need taxes because they have revenues and they can fund all needs of government. That’s neglecting to realize that part of what you build through a tax system is a social contract. So you end up with a weak sense of obligation between citizens and elites. Taxation matters more than our traditional take (which is you need taxes to spend on public goods) — even if you have all revenues in the world, it is very hard to build a state without a real core sense of reciprocal obligations, thus, without building a strong social contract.”

Reciprocity is the word we want to highlight from this excerpt, as trust in institutions is a key part of this outcome. How would people react in Iraq if asked about taxes?

We added this question to a recent study we conducted with residents in several cities and towns in the country (given that it was a study on displacement, these responses are from the host community sample). We pulled the answers obtained in the four largest cities assessed and, not surprisingly, citizens still perceive large gap in the social contract with institutions: paying taxes (citizen obligation) would not translate into better wellbeing (state obligation).

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Data source: Social Inquiry & IOM Iraq (2020) “Cities as Home: Understanding Belonging and Acceptance among IDPs and Host Communities in Iraq.” Forthcoming.