The Political Economy of Domestic Tax Reform in Bangladesh: Political Settlements, Informal Institutions and the Negotiation of Reform

This paper was published in the Journal of Development Studies. The paper explains the persistence of a tax system characterized by low revenue collection and extensive informality in Bangladesh. It combines analysis of long-term formal and informal institutions and of micro-level incentives shaping negotiation of short-term reform. The system is unusually informal, discretionary, and corrupt, but remains resistant to change because it delivers low and predictable tax rates to business, extensive opportunities for corruption to the tax administration, and an important vehicle for fundraising by political leaders and rent distribution to their elite supporters. The dynamics of micro-level reform and external pressure within the constraints of this overarching political bargain is explored. The paper found that the persistent weakness of the tax system in Bangladesh is best understood as the product of well-established informal rules, norms, and networks that have served the broader interests of political, economic, and bureaucratic elites. This ‘political settlement’ has ensured predictably low rates and the strategic distribution of economic rents, despite the existence of widespread corruption, discretion, and informality. Individual reform episodes also reveal significant continuity but highlight the potential for changes in the alignment of power to open new reform opportunities. Furthermore, while this paper has focused on the tax system, it has sought to illustrate the potential for debates over taxation to act as a lens through which to understand broader political dynamics.

Authors: Hassan, Mirza; Prichard, Wilson
Type: Journal Article
Year: 2016