Abstract
The origins of fiscal capacity have traditionally been linked to warfare and democratization. However, non-democratic states also invest in fiscal capacity, even in times of peace. In fact, the majority of income taxes—a cornerstone of government finance—were introduced by non-democratic states in peacetime. This paper is concerned with how autocratic politics shape fiscal capacity. Political institutions in non-democratic states help overcome a commitment problem related to investments in taxation. In order not to risk being deposed by his or her elite supporters, a ruler needs to guarantee that new fiscal tools will not be used opportunistically (e.g. for expropriation of the elite). If the elite supporters can effectively monitor the government, any transgressions will be detected and punishable. Institutions such as legislatures solve commitment problems related to investments in fiscal capacity when they allow oversight and monitoring over the executive branch. The empirical implications are straightforward: in places with strong institutional oversight, which allows the elite to monitor the executive, we should observe higher fiscal capacity. I find support for this notion by analysing newly available historical datasets over tax revenues, tax introduction dates, and political institutions.
Highlights
Scholars across the social sciences emphasize state capacity—the ability of the state to implement various policies—as a key factor behind the success of today’s developed countries
While regime insiders gain from a stronger, more effective state— since it increases the potential monetary rewards of supporting the ruler, and since it increases the resilience of the regime to challengers—there is a risk involved: after the reform is implemented, how can they be sure that the capacity of the state will not be used against them?10 In the case of income tax, there are two concrete aspects that pose a risk for the support coalition
Many of the investments in fiscal capacity were made by non-democratic states, a puzzle that has only recently received attention from social scientists
Summary
Scholars across the social sciences emphasize state capacity—the ability of the state to implement various policies—as a key factor behind the success of today’s developed countries (for a review see Johnson and Koyama 2017). The empirical analysis of newly available historical data—covering the period from 1870 to 2012— reveals that countries with more extensive institutional oversight generate more revenue from income taxes and are more likely to introduce them in the first place These results are robust to the inclusion of a number of controls such as war, economic development, and government ideology, as well as to different econometric specifications. Focusing on one tax allows for a closer study of the mechanisms behind the decision compared to focusing on the overall development of tax revenue over a longer period of time This strategy reduces the risks of conflating fiscal capacity investments with a general willingness to pay, or taxation in exchange for representation, which is the case with earlier research focusing on the general rise in revenues and more fundamental constitutional changes. In non-democratic countries redistribution should be less salient as a motivation since the (poor) majority of the population is excluded from power, making income tax less relevant in terms of class-based redistribution (an exception might be communist dictatorships, where redistribution is part of the ruling ideology). Instead, in non-democratic states income tax should be seen as an investment in fiscal capacity
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