The causal effects of rule of law & property rights on fiscal capacity

Abstract

How have governments in rich countries developed the ability to levy taxes on their citizens and achieve high compliance? While it may seem simple, the process of developing fiscal capacity is often long and torturous. We explore the possibility that governments build this capacity in part by making a credible commitment to strong property rights under the rule of law. We identify large, sustained jumps in how countries score on both broad and narrow measures of legal system and property rights quality and investigate if these jumps produce increases in several measures of fiscal capacity. In a sample of 119 countries from 1970 to 2015, we find sustained improvements in property rights do not cause increases in any of our fiscal capacity measures. If the development of strong property rights is indeed necessary for developing fiscal capacity, it is evidently not sufficient.