Threat of taxation, stagnation and social unrest: Evidence from 19th century sicily

Abstract

Taxation may trigger social unrest, as highlighted by historical examples. At the same time, tax income could boost state capacity which may, in turn, foster political stability. Understanding the a priori ambiguous taxation-turmoil nexus is particularly relevant for low-income countries today – yet causal evidence on the topic is very scarce. Using a regression discontinuity design, we exploit a unique policy experiment in 19th century Sicily to identify the effect of taxation on social unrest. It turns out that it is mostly the threat of taxation that may distort economic investment and ultimately result in greater political turmoil.