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How do political institutions affect fiscal capacity? Explaining taxation in developing economies

Published online by Cambridge University Press:  10 April 2018

Dipartimento di Scienze Economiche, Università degli Studi di Verona, Verona, Italy
Global Development Institute (GDI), University of Manchester, Manchester, United Kingdom
Global Development Institute (GDI), University of Manchester, Manchester, United Kingdom


A central aspect of institutional development in developing economies is building tax systems capable of raising revenues from broad tax bases, i.e. fiscal capacity. While it is recognised that fiscal capacity is pivotal for state building and economic development, it is less clear what its origins are and what explains its cross-country differences. We focus on political institutions, seen as stronger systems of checks and balances on the executive. Exploiting a recent database on public sector performance in developing economies and an IV strategy, we estimate their long-run impact, distinguishing between the accountability and transparency of fiscal institutions (impartiality) and their effectiveness in extracting revenues. We find that stronger constraints on the executive foster the impartiality of tax systems. However, there is no robust evidence that they also improve its effectiveness. Our findings also suggest that the overall impact on both total tax revenues and income tax is economically relevant.

Research Article
Copyright © Millennium Economics Ltd 2018 

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