For Profit, Power and Protection: Landed Elites’ Incentives to Expand Fiscal Capacity

• In Event: Landholding Inequality, Development, and Political Conflict in Latin America

Abstract

Under what conditions do agrarian elites support the capacity of local governments to raise and collect taxes? Scholars have long argued that large landowners have little reason to support enhanced extraction by the state. Because land is a fixed, highly visible asset, wealthy landlords are particularly exposed to taxation and, hence, reluctant to support increasing the power of local fiscal authorities. This paper argues that, despite these considerations, agrarian elites may favor fiscal capacity development. Increased tax revenues often provide resources for financing public projects and services that allow elites to increase productivity and profits, protect their property and consolidate their political power. I use an original dataset that includes fiscal, economic and political information on 1,300 Brazilian municipalities in 1920 to test this argument. Adopting an instrumental variable approach, I find that higher levels of rural inequality lead to greater local tax capacity and increase spending on public works, order and patronage. Results also show that localities where landed elites have more power are more likely to rely on indirect taxes, which fall most heavily on non-elite groups, to finance their expenses. Finally, I provide evidence that powerful incumbents use fiscal capacity to restrain political competition at the district level.

Author

• Giuliana Pardelli, Princeton University