Fiscal capacity in non-democratic states: the origins and expansion of the income tax

Abstract

Fiscal capacity is regularly linked to warfare and democratization. However, 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 the adoption and expansion of income taxes. Political institutions help overcome a commitment problem related to investments in taxation. To avoid being deposed by his or her elite supporters, a ruler needs to guarantee that new taxes will not be used opportunistically (e.g. expropriating the elite). If the elite supporters can effectively monitor the government, any transgressions will be detected and punishable. Institutions such as legislatures solve this commitment problem 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 by analyzing newly available historical datasets over tax revenues, tax introduction dates, and political institutions.

The origins of fiscal states in developing economies: history, politics and institutions

“…Most personal income taxes were introduced by non-democratic states in peacetime, and were an investment in fiscal capacity, rather than a tool for redistribution. Andersson (2022) examines the political conditions under which non-democratic states introduced the personal income state and shows that institutional oversight through legislature is positively related to the adoption and expansion of income taxes in non-democratic regimes. Savoia et al (2022) look at the interplay between political institutions constraining the executive power and tax revenues, in the long-and short-term.…”

Constraints on the executive and tax revenues in the long run

“…Because of intra-elite competition, such fiscal innovation would be more palatable to landowning elites, which saw it as a tool to rebalance in part the economic losses from the rise of manufacturing. Similarly, Andersson (2023) shows that autocracies with legislatures capable of exercising oversight are more likely to introduce a personal income tax and were able to collect more revenue from income taxes than those without the ability to monitor the government. As Collier and Hoeffler (2009) note, political institutions required to have a free and fair elections are significantly different from those placing institutionalised limits on the executive power.…”