Taxation and State Capacity: Insights from the Developing World

Session Submission Type: Full Paper Panel

Session Description

Canonical studies in state-building and taxation have focused on the nature of the fiscal contract between rulers and citizens with empirical support drawn mostly from the rise of consent and representation in early modern European states. Only recently has this question of state and fiscal capacity building in contemporary developing countries begun to been investigated empirically at the micro-level, and the results remain inconclusive. Our panel thus brings together four papers that provide new theoretical arguments and empirical evidence to contribute to this debate. Importantly, these papers use new contemporary and historical data to investigate the micro-foundations of tax compliance by citizens and investments in state capacity by political elites. The data from these studies are drawn from developing countries across three continents—Asia, Africa, and Latin America, attesting to the breadth of the panel’s theoretical and empirical contribution. One commonality across all papers on the panel is that they uncover new logics that challenge or extend our understanding of state and fiscal development informed by experiences in early modern Europe.

The first two papers focus on the political determinants of tax compliance. The paper by Gottlieb and Lebas investigates the impact of political clientelism on tax compliance by using a novel field experiment in Nigeria. Conventional wisdom suggests that trusted informal intermediaries would be more effective at brokering fiscal exchange; however, the authors find the opposite—informational encouragements delivered by an informal agent are worse at inducing tax compliance than those delivered by a formal one. Effects on voter turnout are revelatory: visits to market vendors by informal agents actually depress turnout among coethnics among whom these brokers have more influence and are more likely to know who supports the opposition. Together, the results suggest that informal actors are not credible agents of formal state-building at least in part due to their role in supporting the informal practices that keep incumbents in power. These surprising results highlight the tension between state-building and electoral clientelism.

Meanwhile, Flores-Macías and Sánchez-Talanquer study how spatial inequality affects the relationship between public good provision and willingness to pay taxes. The authors argue that the relationship between perceptions of public safety—the quintessential public good provided by governments—and willingness to pay for it is contingent on the availability of private substitutes such as private security companies or gated communities. In particular, the availability of private alternatives for public security could serve as a substitute to government provided public safety, thus undermining citizens’ tax compliance. Using an original national-representative survey fielded in Mexico, the authors show that spatial inequality generates an inverse relationship between willingness and ability-to-pay taxes that turns insecurity and fiscal weakness into a self-enforcing equilibrium.

The next two papers explore the relationship between taxation and state capacity, drawing from micro-level evidence. The conventional wisdom suggests that high levels of economic inequality and labor coercion are correlated with lower early investments in state capacity which can, in turn, depress longer-term economic development. Using original historical data from Brazil and the U.S. South, Jensen and Pardelli challenge this standard account. They propose a new theory to explain the spatial and temporal variation in Brazil and the US South, two large and highly unequal settings characterized by the widespread use of coerced labor. Pardelli and Jensen argue elites’ incentives to invest in fiscal capacity hinges on their political control over public resources. Only when elites lack political control or perceive uncertain in future control do they have little incentive to invest in state capacity.

Finally, taxation is often considered a cornerstone of state capacity, primarily because it finances public goods and services and enhances bureaucratic competence. Hou, Liu, and Lü argue that previous research overlooks another important role played by taxation—it creates a link between the state and citizens that is otherwise absent. Specifically, taxation can offer sufficient fiscal autonomy to incentivize local elites to help the state maintain local political order. Exploring an exogenous negative shock tax collection due to the abolition of agricultural tax in the early 2000s in China, the authors first document a surprising consequence—the tax reduction increased tax noncompliance and social unrest in rural China. Investigating the underlying mechanisms, the authors demonstrate that the negative effects were driven by weakening fiscal autonomy that dis-incentivizes village elites to assist the state in maintaining local political order.

Sub Unit

• Division 6: Political Economy

Individual Presentations

• The Implications of Clientelism for State-Building: Evidence from Nigeria - Jessica Gottlieb, University of Houston; Adrienne LeBas, American University

• Spatial Inequality, Public Good Access, and Support for the Tax State in Mexico - Gustavo A. Flores-Macias, Cornell University; Mariano Sanchez-Talanquer, El Colegio de México

• State Capacity, Labor Coercion and Political Control in the US South and Brazil - Giuliana Pardelli, New York University Abu Dhabi; Jeffrey Louis Jensen, New York University-Abu Dhabi

• Not Just About the Money: Rethinking the Role of Taxation in State Capacity - Xiaobo Lu, University of Texas at Austin; Linke Hou, Shandong University; Mingxing Liu, Peking University

Chair

• Jessica Gottlieb University of Houston

Discussants

• Francisco Garfias University of California, San Diego

• Cesar Zucco Getulio Vargas Foundation