Warfare, Fiscal Gridlock, and State Formation during Europe’s Military Revolution

Abstract

We analyze a general commitment problem inherent to the formation of tax states: How can a state credibly promise to use tax revenues for pre-specified purposes? At the start of the early modern period in Europe, monarchs controlled expenditure. Where parliaments controlled taxation, the result was endemic fiscal gridlock—which became increasingly intolerable during Europe’s military revolution. Exploiting a new panel database, we show that warfare was associated with significant fiscal reforms—either increasing the crown’s powers of taxation or parliament’s powers over expenditure. Although pure parliamentary control was rare, we show that even absolutist monarchies decreased the amount of expenditure that the crown controlled. Reducing the crown’s ability to unilaterally determine how to spend state revenues directly mitigated the fiscal commitment problem, by making the state’s expenditure promises more credible, and was associated with significantly greater revenue extraction.