The Paradox of Power: Understanding Fiscal Capacity in Imperial China and Absolutist Regimes

Abstract

Tax extraction is often low in absolutist regimes. Why are absolutists unable to convert power into revenue? Supported by evidence from Imperial China, we explain this puzzle with a principal-agent model which reveals that absolutists, unconstrained by rule of law and unable to commit to not predating on their taxcollecting agents (and the masses), may find it optimal to settle for a low wage-low tax equilibrium, while permitting agents to keep extra, unmonitored taxes. Our analysis suggests that low investment in administrative capacity is a conscious choice for an absolutist since it substitutes for credible commitment to refrain from confiscation.

Autocratic Rule and Social Capital: Evidence from Imperial China

“…As Ma and Rubin (2017) document, this was perfectly compatible with the highly centralized nature of the Qing political system. The combination of low taxes and unconstrained autocratic rule reflected the equilibrium choices made by Qing rulers.…”

State of forgiveness: Cooperation, conciliation, and state formation in Mughal South Asia (1556–1707)

“…Ma and Rubin, for instance, have argued the premodern Chinese state adopted a low-wage, lowtax model because the empire could not commit to no confiscation, a problem the Mughal empire clearly did not face. 146 Conversely, Pfaff and Hetcher have found mutinous pirates and sailors were pardoned increasingly more often by the British navy. 147 Rebel forgiveness tells a wider story of bargaining power of intermediaries influencing institutional design.…”

The Ideological Roots of Institutional Change

“…It was in the face of two contemporaneous crises-the rapid decimation of Chinese forces by the British in the First Opium War (1839-42) and numerous internal revolts, with the Taiping Rebellion being the most bloody and dangerous to the regime's future-that the Qing realized the need to modernize their economy and military. Revenues were too low to contain further rebellion (Ma and Rubin 2017), while the Qing faced an existential crisis of European domination that was temporarily relieved by their acquiescing to humiliating trade deals that gave Westerners extraordinary commercial powers within China. The adoption of Western institutions would have o¤ered a solution to China's relative stagnation; politically constrained rulers, like those of the leading European powers, could have raised much more tax revenue and issued sovereign debt, while opening up markets and reducing arbitrary powers of government o¢ cials would have encouraged the adoption of techniques and technologies.…”

“…However, if the role of ideology is to help individuals make generalizations about the complex environment within which they operate, it is easy to imagine the ruler having an optimal ideology, D R 2 R + , which lends it political legitimacy and justi…es its rule. Historical examples of such ideology include the "divine right of kings" doctrine employed by the English Stuart dynasty and Louis XIV of France, the Mandate of Heaven claimed by numerous Chinese emperors, or various Islamic doctrines supporting rulers who "act consistent with the faith" (Greif and Rubin 2015;Ma and Rubin 2017;Rubin 2017). These ideologies may a¤ect or be a¤ected by the institutional and technological environment of the society.…”