The Origins of State Capacity: Property Rights, Taxation, and Politics

Abstract

Economists generally assume that the state has sufficient institutional capacity to support markets and levy taxes. This paper develops a framework where "policy choices" in market regulation and taxation are constrained by past investments in legal and fiscal capacity. It studies the economic and political determinants of such investments, demonstrating that legal and fiscal capacity are typically complements. The results show that, among other things, common interest public goods, such as fighting external wars, as well as political stability and inclusive political institutions, are conducive to building state capacity. Some correlations in cross-country data are consistent with the theory. (JEL D72, E62, H11, H20, P14)

Government and Human Capital in a Model of Development Through Modernization and Specialization

“…Task-specific skill production is not modeled for unskilled workers, because, in real economy, unskilled jobs require much less investment in specific skills to perform their tasks satisfactorily. 10 Let l i (s) be the total time spent on the task by the worker. She allocates the time between the development of the specific skill and the production activity to maximize the outcome:…”

Does military pressure boost fiscal capacity? Evidence from late-modern military revolutions in Europe and North America

“…Historical research on this topic has inspired a growing theoretical literature that analyse the links between warfare, fiscal capacity and economic performance. See, for instance, Besley and Persson (2009), Dincecco and Prado (2012).…”

“…overlooked (Jaggers, 1992;Besley and Persson, 2009;Dincecco and Prado, 2012). 2 This paper argues that the outburst of major wars has effectively shaped the long-term evolution of public revenues in late-modern times, but provides a new theoretical approach in order to better understand the interplay between warfare, military pressure and fiscal expansion.…”

“…In this regard, Besley and Persson (2009) conclude that those countries that were more engaged in international wars in late-modern times ended up with a higher share of direct taxes within total public revenues. On the other hand, Aidt and Jensen (2009) observe that the establishment of temporary income taxes often coincided with the outburst of wars, as happened in the United States during its Civil War (1861-65), in the Austrian Empire during its war against Sardinia (1848-49) or in Denmark during its wars against Prussia (1848-49 and 1864).…”

“…The author concluded that inflated levels of resource mobilization in international military conflicts (measured as the total number of battle deaths) and the 'societal trauma' caused by civil wars (measured by a combination of the number of battle deaths per 10.000 inhabitants and the political outcome of the war) led to increasing post-war state revenues per capita. From a different empirical strategy, Besley and Persson (2009) and Dincecco and Prado (2012) argue that late-modern and early-modern wars are positively correlated with present fiscal capacity (measured, among other variables, by the average of the current share of taxes over GDP) in broad international datasets. Finally, Dincecco, Federico and Vindigni (2011) find a positive correlation between higher levels of military spending and taxation in the Italian states during the Risorgimento.…”