The Impact of Consumption Taxes on Progressive Spending in Countries of the Global South

Over the last decades, the majority of the countries of the Global South implemented value-added taxes, mainly due to pressure of International Financial Institutions to modernize the tax system. The value-added tax, although considered as regressive, is supposed to generate higher revenue and consequently to increase poverty-reducing spending. In this paper, I argue that the probability of increased progressive spending depends on tax bargaining processes on the domestic level. Being taxed motivates political actors to demand representation and accountability from governments. However, tax bargaining processes do not emerge automatically; actors need a certain level of trust in the rule of law and the quality of bureaucracy as well as the certainty that politics is not mainly driven by corruption. Thus, the emergence and success of tax bargaining processes and consequently higher progressive spending are conditioned by the quality of government. I test the argument empirically by using a dataset that covers 64 countries of the Global South over the period from 1995 to 2013. The results indicate that countries whose revenue relies stronger on value-added taxes indeed increase progressive spending but only in an institutional context of a high quality of government.