The Rent-Seeking State and Revenue Diversification

Abstract

Economists have only recently begun to characterize the behavior of the state as rentor profit-seeking. One of the ways in which the rent-seeking state may maximize the resources it extracts from taxpayers is through diversification of the tax revenue base. Empirical evidence presented in this paper may help to explain the extent to which countries are able to engage in this form of rent seeking. The highly developed country's ability to diversify its tax base is constrained by the ease of exit of taxable assets from its jurisdiction; with the exception of this limitation, countries with more diversified tax bases collect more revenue relative to national income. This conclusion does not hold, however, for geographic diversification (i.e., federalism). The case is different for developing countries: although they may have a more diversified tax base than developed countries, they are unable to exploit it because of administrative weakness; therefore, rent seeking on the part of the state may be predicted by more conventional factors such as income or trade.