Introduction
The following lines are attributed to Adam Smith, a founding figure of classical economic theory whose principles for an ideal tax system continue to resonate today:
Little else is required to carry a state to the highest degree of affluence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and, to support themselves, are obliged to be oppressive and tyrannical.Footnote 1
Three centuries later, Adam Smith’s vision contrasts with the reality of countries burdened by armed conflict, complex tax systems and intermittent justice. These countries, far from Smith’s vision, are often those where criminal organisations exert forms of governance, controlling territories and daily aspects of the population’s lives through coercive mechanisms such as extortion.
Existing research has only partially addressed the intersection of extortion by criminal organisations and formal tax systems, with much of the focus concentrated on the social and economic consequences of extortion.Footnote 2 This is surprising, considering that, in many cases, extortion has grown so pervasive that it has evolved into an informal tax system embedded in the structure of society. Given that all modern jurisdictions have formal tax systems governing people and income that may also be affected by extortion, there are likely multiple points of intersection between formal taxation and extortion. At the very least, the way in which states implement and monitor their tax systems is bound to be impacted.
It is important to clarify that I do not claim extortion is equivalent to formal taxation, as the latter relies on a particular form of legitimation: the rule of law. However, in the public perception, extortion can be seen as an informal tax when it is systematic and has the same financial impact on those affected. With this in mind, this article explores, through secondary analysis research, the theoretical interactions between extortion carried out by criminal organisations and the taxing power of the state, both of which are fiscal functions. To do this, I will use the case of Central American gangs and their criminal governance to examine the processes of tax collection by both the state and criminal organisations, highlighting the fundamental elements these processes share.
This article is organised into four sections, each addressing different aspects of taxation. The next section provides a brief overview of the foundational concepts of formal taxation. I then examine the intersection of formal taxation with informal tax systems and criminal governance, highlighting how non-state actors, like criminal organisations, impose their own forms of taxation in areas with weak state control. The following section presents a case study of Central American gangs, particularly in the Northern Triangle, illustrating how these gangs establish authority through systematic extortion, which has escalated into a widespread crisis. I then theorise the interactions between gang-controlled territories and state fiscal functions, addressing the challenges posed by dual taxation systems and exploring the potential for hybrid governance in regions where criminal organisations exert significant control. Finally, I present conclusions and offer insights into future directions of research.
On Formal Taxation
Taxation, as Isaac William Martin, Ajay K. Mehrotra and Monica Prasad remind us, is ‘not primarily predation; it is the embodiment of a social contract’.Footnote 3 But in reality, the social contract, understood as an implicit or explicit agreement between individuals to coexist within a political order, need not be egalitarian, redistributive or even inclusive.Footnote 4 Historically – and here I focus specifically on the tax dimension of these (fiscal) social contracts – states have raised revenue through coercive and regressive means, often before any meaningful political consensus or equitable citizenship existed.Footnote 5 Nonetheless, the concept of the social contract remains useful for understanding how tax obligations are legitimated over time, especially as state institutions evolve from coercion toward more formalised legal authority.Footnote 6
In this context, a formal tax system refers to the institutionalised and legally sanctioned framework through which a state collects compulsory payments from individuals and entities deemed taxable.Footnote 7 It operates within a broader fiscal constitution that defines and constrains the state’s power to tax, relying on principles such as legality, fiscal sovereignty and the rule of law to establish predictability and legitimacy in revenue collection.Footnote 8 At the same time, tax systems are expected to operate under the rule of law, offering predictability and legal certainty to taxpayers.Footnote 9 Compliance, however, does not stem from legality alone. As Agustín José Menéndez and Miranda Stewart emphasise, legitimacy must also be earned through transparent, accountable governance that builds public trust in the exercise of fiscal authority.Footnote 10
Tax morale – the willingness to comply with tax obligations – is shaped by a confluence of factors: institutional quality, political trust, group norms, historical memory and perceptions of reciprocity.Footnote 11 While some view taxes as a civic duty, others see them as coercive extractions, particularly in settings where state services are absent, uneven or corrupted.Footnote 12 Edward Troup famously described taxation as ‘legalised extortion’, a sentiment echoed in colonial contexts where levies like the poll tax served more to subjugate than to fund public goods.Footnote 13 Today, these dynamics persist where taxation is experienced without visible benefits, exacerbating distrust and noncompliance.
Security provision is a particularly salient case. In contexts such as Latin America, the absence of public safety undermines confidence in the tax state and reduces tax morale.Footnote 14 As Néstor Castañeda, David Doyle and Cassilde Schwartz note, this leads to an ‘opt-out’ dynamic in which wealthier individuals turn to private providers for essential services, further weakening the ‘social contract’.Footnote 15 In this way, the relationship between taxation and state legitimacy is recursive: the state’s ability to provide public goods builds trust, which fosters compliance, which in turn enables further provision. When this cycle breaks – through institutional failure, corruption, or insecurity – trust in government erodes, and revenue collection fractures.
The Intersection of Tax Governance, Informal Taxation and Criminal Governance
Introducing Tax Governance
Governments face challenges designing and implementing tax systems across their territory. This process of designing and implementing the tax system, or the act of taxation itself, is known as tax governance or governance by taxation.Footnote 16 Within a constitutional framework, the design of the tax system is inherently tied to its legal dimensions – as elements such as tax bases, rates, timing, taxable units, intermediaries and jurisdictions must all align with the constraints imposed by a nation’s constitution.Footnote 17 The implementation of the tax system presents more challenging dimensions.
A government cannot effectively implement a tax system through legal provisions alone. It must also consider the economic, political, administrative, cultural and other factors that influence its effective implementation. Vincent Ostrom once said that governance or government should not be understood as something provided by states alone, since several forms of human association, such as families or local communities, also build institutional arrangements that shape daily life.Footnote 18 Extending this insight to taxation, we need not think of tax governance as something provided by states alone or by the formal rules of a tax system, but also as something shaped by human associations, such as those of a criminal nature, that affect how fiscal obligations are perceived, enforced or displaced. No matter how well designed a tax code may be, it is of little value if the state is unable to enforce it. The next section examines a rarely addressed factor behind uneven enforcement across countries: the presence of parallel informal tax systems – especially those run by non-state armed actors – and their interaction with formal taxation.
Conceptualising Informal Tax Systems
Vanessa van den Boogaard, Wilson Prichard and Samuel Jibao highlight the presence of ‘informal taxes’ in low-income countries, distinguishing them from legally mandated ‘formal taxes’.Footnote 19 While formal taxation operates through established government structures, informal taxation encompasses a variety of unconventional revenue-generating practices that function outside official tax frameworks. In many low-income countries, where formal taxation is often limited, residents contribute to the development and maintenance of public goods through these informal channels, as noted by Benjamin A. Olken and Monica Singhal.Footnote 20
These practices, shaped by historical, cultural and socio-economic factors, serve to supplement or bypass formal tax systems. For example, in low-income African countries, individuals frequently make non-market payments to support public goods, directing these contributions to both state and non-state actors.Footnote 21 Although these payments are not legally codified, they significantly influence the economic landscape, playing a crucial role in sustaining local governance – or, in some cases, non-governance – in specific regions. In this regard, the fact that individuals comply with fiscal obligations not established by law prompts reflection on the varying perceptions of what constitutes a tax across countries, where levies not officially classified as taxes may still be seen as such, particularly when consistently collected by a non-state actor.
Recognising this, scholars like Jori Breslawski and Colin Tucker have adopted a broad definition of taxation as ‘the regularized collection of money from civilians’.Footnote 22 This approach is fitting, as civilians – community members in a specific territory – can be systematically impacted by both formal and informal tax systems. For the latter, I refer to van den Boogaard et al.’s definition, which describes informal taxation as ‘all payments made to state or non-state actors – either in cash, in-kind or through labour – that are outside of formal laws but related to the financing of public goods or broader state or non-state governance functions’.Footnote 23
These informal tax systems manifest across various religious, cultural and institutional contexts. For example, the Zakat, a pillar of Islam, entails an annual payment from an individual’s wealth and may be collected or overseen by either the state or non-state actors in Muslim countries.Footnote 24 In addition, non-state authorities, such as Sierra Leone’s chiefs, may wield informal taxing power at a local level, which is separate from the state’s power.Footnote 25 In other variations, there is a type of ‘hybrid governance’ that oversees an organisational arrangement between the state and non-state actors as a way of filling the gap in (the lack of) state capacity to administer taxes.Footnote 26 Specifically for the latter, there can be a fine line between formal and informal, depending on the collection roles performed by non-state actors. They may operate informally to collect formal taxes or have a formal connection with the state, making their actions more legitimate, by collecting and delivering informal taxes to the state.Footnote 27
Within a constitutional framework, informal tax systems should ideally not exist, as any system operating outside the rule of law lacks institutional structure and creates unpredictable consequences for taxpayers – even when the state is somehow involved. In the worst-case scenario for tax governance, the informal tax system runs parallel to the formal system, with little or no state influence, and is managed by non-state actors. This is especially problematic where the nature of these non-state entities – such as criminal organisations that coerce communities through violence – can be directly opposed to the state’s goals.Footnote 28
When Criminal Governance Steps In: Role of Criminal, Non-State Armed Actors in Informal Tax Systems
Non-state armed actors encompass a wide range of entities that operate outside the formal state apparatus, yet exert significant influence over governance within specific territories or populations. These actors include rebel groups, warlords, criminal networks, paramilitary organisations and terrorist groups.Footnote 29 While they are typically associated with violence and coercion, their role in governance – particularly in areas where state control is weak or contested – can be both extensive and complex. Therefore, a broad definition of non-state armed actors, as proposed by Claudia Hofmann and Ulrich Schneckener, is that they are distinct organisations willing and able to use violence to pursue their objectives, not integrated into formal state institutions (even if supported or instrumentalised by the state), and thus possess a certain degree of autonomy in politics, military operations, resources and infrastructure.Footnote 30
Throughout this section, I align with the assertion that ‘armed groups tax’.Footnote 31 These non-state, armed actors leverage their capacity for violence and coercion to demand monetary or non-monetary payments from civilians. Such forms of taxation, often taking the shape of crimes like extortion or racketeering, are vital revenue sources that sustain their financial operations.Footnote 32 However, it is crucial to recognise that not all armed groups engage in taxation, and those that do may have differing objectives.Footnote 33 A recent study of the motives of armed groups – ranging from paramilitary forces in Latin America to Islamic fundamentalist organisations – reveals a variety of purposes beyond simply generating revenue.Footnote 34 Armed groups also use taxation to enforce ideological goals, build legitimacy, develop institutions, increase control over civilians and assert public authority.Footnote 35
When this power is exercised by non-state armed actors identified as criminal organisations – territorial armed groups that employ coercion and corruption to impact local elections, control security, allocate public resources and influence civil society participation – they create an alternative form of governance referred to as ‘criminal governance’.Footnote 36
Criminal Governance: Definition, Key Characteristics and Interaction with the State: Criminal governance refers to the imposition of rules and norms, and even the distribution of public goods by criminal organisations, effectively creating alternative structures of authority where state power is absent, sporadic or even complicit with the criminal organisation.Footnote 37 This absence or intermittency does not imply that the state is non-existent in the territory, but rather that its overall capacity is lacking. The state is unable to control violence, enforce laws, collect taxes, regulate economic activity or provide public services effectively.Footnote 38 Similarly, criminal governance is not simply the result of criminal organisations operating outside the law, but rather of a system in which these groups take on roles traditionally associated with the state, such as maintaining order and providing security.Footnote 39
A distinguishing characteristic of criminal governance is its localised nature. Guillermo Trejo and Sandra Ley compare it to ‘rebel governance’ observed in civil wars, where non-state actors seize control over specific territories. However, unlike rebel groups, criminal organisations, such as drug cartels or Central American gangs, do not aim for formal political authority.Footnote 40 Instead, their focus is on dominating subnational regions, often filling voids in state governance. This localised control leads to a ‘duopoly of violence’, where criminal organisations and the state coexist in a tense but stable relationship.Footnote 41
As pointed out by Andres Uribe et al., this reality challenges the Weberian definition of the state as a ‘human community that successfully claims the monopoly of the legitimate use of physical force within a given territory’.Footnote 42 In practice, states rarely exercise an absolute monopoly on the use of force as various actors like armed groups and mafias compete for influence within the same territory.Footnote 43 When states lose control over local communities, residents experience a duopoly of violence or coercion.Footnote 44 States may eventually acknowledge and adapt to this duopoly when they recognise their lack of complete control over territories held by criminals.Footnote 45 This coexistence between state and criminal actors is highly complex, especially when criminal organisations are deeply entrenched in political and social systems. This leads to multiple layers of relationships that affect local communities and their residents in distinct ways.Footnote 46
Furthermore, beyond explaining criminal governance as merely filling gaps or compensating for intermittent state capacity, criminal forces can also complement or even strengthen their role in response to increased state presence. As an example, a recent study by Christopher Blattman et al. on gang rule in Medellín suggests that common policy interventions aimed at combatting criminal organisations can have unintended consequences, especially when these groups have indirect motives for governance.Footnote 47 Building on this, Blattman et al. highlight how police crackdowns or efforts to curb extortion may unintentionally bolster gangs by enhancing their legitimacy in key neighbourhoods. Additionally, public investments in governance and security can either restrain gangs or, paradoxically, further legitimise them.
The Role of Extortion in the Fiscal Functions of Criminal Governance: In the context of criminal governance, one of the several functions that criminal organisations perform is fiscal, which includes the collection of ‘taxes’ through the practice of extortion.Footnote 48 This function mirrors traditional state activities, with criminal organisations imposing levies on businesses, civilians and even other criminal actors. However, depending on the degree of criminal governance, extortion ranges from arbitrary and unpredictable demands to more structured and regular payments that mimic state tax systems.Footnote 49
This extortion often serves as a fee paid for services – ‘promised but not provided’, as described by Federico Varese.Footnote 50 When criminal organisations establish close ties with communities where their presence surpasses that of the state, community members may come to rely more on these non-state actors than on the government itself.Footnote 51 Among the various services provided by criminal organisations – such as protection, social order and employment – is a relationship that, while effective, comes at the dangerous cost of undermining the rule of law, restricting freedom of movement and violating numerous other rights.Footnote 52 For this reason, as Benjamin Lessing points out, it is puzzling how criminal organisations become a source of chaos and order when they extort communities while simultaneously providing public goods and enforcing rules.Footnote 53 Nonetheless, this paradox, namely the coexistence of coercive extortion and service provision, relates to how the population perceives extortion as a mechanism that provides something in return, creating a certain level of community support.Footnote 54 This perception enables some criminal organisations to evolve beyond being mere protection rackets.Footnote 55
The extent to which criminal organisations rely on extortion often depends on the profitability of their illicit ventures, such as drug trafficking, fraud, loan sharking, smuggling and others. Typically, if organisations generate more revenues from these latter operations, extortion would be a less important source of revenue.Footnote 56 Many Central American narco-traffickers rarely engage in extortion.Footnote 57 In other criminal structures like youth gangs and mafias, extortion becomes a fiscal tool of control that not only maintains financial stability but is also essential for the organisations’ survival, enabling them to expand their armed dominance and governance capabilities.Footnote 58
Legitimacy of Extortion in Criminal Governance: Despite the illegal nature of extortion activities carried out by criminal groups, their governance can achieve a certain level of legitimacy in the eyes of the communities they control. As Lessing and Graham Denyer Willis argue, this type of legitimacy is bottom-up, deriving not from formal state recognition but from the consent or acquiescence of the governed populations.Footnote 59 It cannot be any other way, as it is the economic, social and cultural ties that criminal organisations build with these communities that allow them to be viewed as legitimate authorities, even when performing functions like taxation.Footnote 60
The legitimacy of criminal governance has been documented in instances of community acceptance of and, in some cases, collaboration with criminal organisations, which in turn creates a crisis of legitimacy for the state.Footnote 61 If a criminal organisation provides security and controls government contracts that allow for reinvestment in the community – such as in the case of the milícias in Brazil – resulting in ‘publicly peaceful communities characterized by semi-clandestine threats against opponents’, it becomes intuitive for a resident to prefer giving their money to these groups rather than to the state.Footnote 62 That said, this acceptance and collaboration, while reflecting a close relationship, does not necessarily signal genuine support or enthusiasm. Ultimately, extortion remains a form of violent coercion within an atmosphere of tense calm.Footnote 63
Whether someone refers to this extortion as a ‘vacuna’ (‘vaccination’), a ‘war tax’, or something else, it ultimately mimics, at its most rudimentary level, taxation as ‘collection of money from civilians’.Footnote 64 This collection, when systemic and ingrained as part of the living environment, becomes a normalised aspect of life that leads to a behaviour of everyday acceptance, everyday neutrality or everyday resistance.Footnote 65 These behaviours are also observed in the sphere of formal taxation, where acceptance may involve filing a correct tax return, while resistance could take the form of avoiding paying taxes. With extortion, acceptance might involve making the demanded payment to the extortionists, whereas resistance could involve forming communal self-defence groups to violently oppose these actors.Footnote 66 So, similarly to formal taxes, extortion payments may vary in their form of collection – be they coerced, negotiated or voluntary – and the benefits derived from them may differ, but it is their economic effect that primarily defines them as a tax, while the authority of the enforcer – influencing the individuals’ decisions to comply or resist – shapes their perceived legitimacy. As Nelson Kasfir et al. argue, the legitimacy of armed groups lies in what they refer to as ‘a tacit social contract between the ruler and the ruled’.Footnote 67
Given the above, we must assume that the legitimacy accorded to extortion has an impact on the legitimacy of formal taxes. Often, Western notions of an ideal tax system, potentially overlooking the diverse realities faced by individual taxpayers, shape our interpretations of fundamental concepts.Footnote 68 Despite that, the reality of someone living in communities governed by criminal organisations adds a layer of complexity to the tax system that is often neglected in tax scholarship, but it provides insights into confrontations between tax and criminal governance.
Interim Conclusions: Conflict between Tax and Criminal Governance
When lawmakers create general tax laws, they cannot do so with the idea that income tax or any other type of tax will apply only to people living in a specific city or neighbourhood within that city. On the contrary, the power to tax is an exercise of sovereignty over a well-defined territory and the specific set of individuals residing within it.Footnote 69 Yet, the presence of a criminal group in a specific community disrupts this exercise of tax sovereignty when it controls part of the territory and regularly imposes its own forms of taxation. In other words, the existence of systemic extortion under criminal governance reveals a form of informal tax governance that overlaps with key characteristics of formal tax governance: authority over individuals and territorial control.Footnote 70
By its very nature, the fiscal functions exercised within criminal governance – what I would conceptualise as criminal tax governance – represent a far more fragile form of authority. Unlike state taxation, which operates within legal frameworks, criminal organisations enforce arbitrary extortion taxes without formal regulations or consistent application. These taxes can cease abruptly, particularly when criminal actors are eliminated through violent confrontations with state forces. In contrast, the state’s power to tax, rooted in legal norms, ends only with the collapse of the state itself – an unlikely event.
It is reasonable to assume that in areas where the state’s presence is weak, its capacity to collect taxes is severely limited, and individuals may struggle to distinguish between taxes imposed by the state and those imposed by criminal organisations, as both similarly affect their income.Footnote 71 When the state fails to provide essential services, its tax system loses legitimacy, allowing criminal actors to fill the void and exert fiscal control.Footnote 72 As the power of state laws weakens due to lack of enforcement or failure to meet the population’s needs, criminal organisations gain tax authority.
At the same time, control over territory is essential to maintaining tax sovereignty, as tax systems are often built around a principle of territoriality, where taxes are levied on income generated within a specific jurisdiction.Footnote 73 This jurisdiction assumes a stable rule of law, which is unusual for regions under criminal governance. Clearly, the consequences of the lack of territorial control may be different for formal tax governance. For example, while individuals in these areas may still voluntarily declare and pay taxes, the state’s ability to conduct audits or implement assistance programmes in these zones is probably constrained by the lack of territorial control.
This raises an important point of reflection for tax policymakers and scholars regarding the idea of territory as an all-or-nothing concept in tax law. Much like the concept of property, authority over a territory can involve distinct degrees of rights, even though, in theory, the state should hold exclusive control over all such rights.Footnote 74 Therefore, even though the state formally exercises sovereignty and fiscal authority over a given territory, criminal organisations become violent claimants to that territory – gaining access to and control over it. In the worst cases, they could be considered de facto owners of the territory, as they hold enough power to grant or deny access to the state itself.Footnote 75
In sum, tax governance and criminal governance coexist in a form of multi-layered governance, enabling various channels of interactions between taxpayers and the state, taxpayers and criminal actors, and between the state and criminal actors. Given this context, an analysis of the intersection of these governance systems can be conducted in any national setting where fiscal authority and territorial control are undermined by security challenges. In the remainder of the study, I focus on the Northern Triangle of Central America, a region where – similarly to the rest of Latin America – tax morale is impacted by security issues, compounded by elite dominance and corruption.Footnote 76
Central American Gangs in the Northern Triangle
The Northern Triangle of Central America – comprising El Salvador, Honduras and Guatemala – has long been marked by political instability, social inequality and economic volatility. These patterns are also evident in the development of their tax systems. Aaron Schneider describes their trajectory as being ‘defined by the nature of social cleavages between rising and declining elite sectors’.Footnote 77 Despite deeper integration into international markets since the 1990s and some improvements in tax collection, overall tax revenues of these countries remain low relative to other regions.Footnote 78 Alongside this limited fiscal capacity and increased urban migration, chronic issues such as unemployment, elite dominance, social fragmentation, corruption and widespread crime persist.Footnote 79
From the standpoint of the fiscal social contract, this fragmented and crisis-ridden trajectory raises many questions: has such a contract ever truly existed in the region? Or do we assume its existence merely because a formal tax system is in place? If it does exist at all, it is likely a weak one. Furthermore, when examining patterns of criminal governance, one might argue that the fiscal social contract in the Northern Triangle reflects a case of contested sovereignty.
Nowhere is this more apparent than in matters of public security. This region has emerged as one of the most violent globally. When contemplating the Central American isthmus, thoughts often turn to the longstanding issues of crime and violence that have impacted the area for years.Footnote 80 Within this region, the prevalence of gang violence is directly linked to the elevated murder rate acknowledged by governments. Two gangs, Mara Salvatrucha (known as MS-13) and Mara Barrio 18 (M-18), have evolved into formidable transnational threats, attracting extensive scrutiny for their violent conduct and consequential impact at both the state and community levels.Footnote 81
Although these groups have expanded their reach internationally, their centres of operation remain entrenched in the Northern Triangle. Notably, a source of profound concern within local communities stems from these gangs’ extortion activities. By examining their history and understanding their tax functions, we can gain insights into how their systematic practice of extortion intersects with formal tax governance in Central American countries.
Emergence and Struggle with Authority
Central American gangs originate from extensive networks of groups tied to the migration patterns and identity affiliations of two street gangs that originated in Los Angeles, California, in the 1980s.Footnote 82 By the 1990s, they had established a presence in Central America, with their main hubs of operation in El Salvador, Guatemala, and Honduras, and memberships numbering in the thousands.Footnote 83 As Steven Dudley has noted, there have historically been significant differences in the presence and influence of gangs across these countries.Footnote 84 In Guatemala, the gangs primarily operate in major cities, focusing on extortion and small-scale drug trafficking despite government crackdowns. In contrast, in El Salvador, MS-13 has evolved into a more sophisticated network, with some factions establishing themselves as transnational criminal groups, controlling key smuggling routes and extending their reach to US cities. In Honduras, while gang influence has been similarly concentrated in urban areas as in Guatemala, mass incarceration efforts have failed to weaken their control, leaving their local power largely intact. From the early 2000s, these enforcement measures to combat gang crime, predominantly relying on repressive tactics, were known as ‘mano dura’ (‘firm hand’) policies.Footnote 85
For most of this century, the mano dura policies in the Northern Triangle have been a failure, resulting in an increased prison population rather than a reduction in crime rates.Footnote 86 The aggressive anti-gang strategy exhibited several shortcomings. As highlighted by Lirio Gutiérrez Rivera, the reliance on repressive measures underscored the vulnerability of state strategies in asserting control over specific groups and areas.Footnote 87 The necessity to wage a ‘war against gangs’ and to allocate substantial budgets to counteract violence highlighted the gravity of the issue. Despite the promising names of anti-gang plans, such as El Salvador’s ‘Super Mano Dura’ or Guatemala’s ‘Plan Escoba’ (‘Operation Broom’), which envisioned a nation free from gang violence, the aggressive nature of these governmental actions faced scrutiny due to accusations of human rights violations when measures exceeded ordinary due process safeguards.Footnote 88 Consequently, shifts from repressive to preventative approaches have been advocated in each country to varying extents, but have proved short-lived.
MS-13 and M-18 continue to be a major threat, officially considered enemies of the state, but evidence of their ties with police chiefs, government officials, politicians and criminal organisations has weakened the legitimacy of the elected governments; such ties have become a central issue in Northern Triangle public policy.Footnote 89 Following the COVID-19 pandemic, a new wave of mano dura policies, spearheaded by El Salvador’s President Nayib Bukele, has been carried out. On 27 March 2022, Bukele initiated a war against criminal organisations through the implementation of an ‘Exception Regime’.Footnote 90 This regime entailed the suspension of constitutional rights, including the right of detained individuals to be informed of their rights and the reasons for their detention, the right not to be compelled to testify, the right to the inviolability of personal communications and the right to be assisted by a defence lawyer.Footnote 91 Moreover, provisions such as the maximum detention period and the inviolability of correspondence have been temporarily lifted. While the regime has been acknowledged for its effectiveness in reducing homicide rates, it has faced criticism for violating human rights.Footnote 92 Following El Salvador’s lead, Honduras has implemented its own ‘State of Exception’, mirroring El Salvador’s crackdown on gangs (although without the same success), while Guatemala, under the government of Bernardo Arévalo, joined this trend in January 2026 when it declared a 30-day state of siege in response to escalating gang-related violence.Footnote 93
El Salvador’s war against gangs is particularly interesting for revealing the fragility of criminal governance among Central American gangs. In a period of two years, ‘Bukele’s Model’ successfully dismantled gang rule in the national territory, beginning with alleged clandestine negotiations between government officials and the country’s main gangs, followed by a swift and intensive state of emergency.Footnote 94 This process can be interpreted as an example of the state’s ‘restoration of legitimacy’, as it succeeded in reestablishing order in and control over areas previously dominated by organised crime. Despite the popularity of these measures, the state’s recovery of legitimacy has resulted in democratic backsliding due to the concentration of power in the executive and suspension of constitutional rights, prompting the Inter-American Commission on Human Rights to call for their reversal.Footnote 95
Organisational Structure and Territorial Control
The organisational structures of MS-13 and M-18 are not uniform, as their operational cultures, power dynamics and sources of income differ from country to country.Footnote 96 However, the two gangs share a loyalty-based membership and hierarchical organisation, which contributes to their fearsome reputation.Footnote 97 Members, bonded by a brotherhood mentality, embrace a subculture marked by initiation rites, symbols like tattoos and graffiti, and a shared perception of violence and death.Footnote 98 Recent indictments in the United States reveal the formal hierarchy within MS-13 and M-18, with leadership bodies like the ‘ranfla histórica’ – a higher-ranking body comprised of veteran leaders – and ‘cabecillas’ (ringleaders), who oversee national operations from within the prison system.Footnote 99 Beneath this top tier, ‘programas’ or ‘tribus’ are managed by mid-level leaders who supervise smaller cliques.Footnote 100 These cliques, comprising 10 to 15 members, are responsible for extortion and territorial control. Within these cliques, roles are distributed among fully initiated members (‘homies’ or ‘homys’), trusted non-members (‘paisas’), and younger recruits (‘banderas’).Footnote 101 Yet, as explained by José Miguel Cruz et al., while these gangs share common features such as the clique serving as their operational unit and leadership operating from prisons, their structures are shaped more by local circumstances than by a standardised identity-based model, with neither MS-13 nor M-18 following a transnational organisational blueprint.Footnote 102
Gang control over territory significantly impacts state capacities, with the scale of gang presence and membership differing across regions.Footnote 103 In this respect, Salvadorean gangs have a widespread presence throughout the country while, in Honduras and Guatemala, gangs are more concentrated in specific urban areas.Footnote 104 Moreover, gangs are able to translate their territorial presence into concrete organisational advantages because of their large membership bases, though the exact numbers remain uncertain due to different definitions of gang affiliation and potential overestimation by authorities.Footnote 105 Gang membership in Central America is widely debated: it was estimated at over 300,000 in 2006, with approximately 54,000 gangs across Honduras, Guatemala and El Salvador (2012 and 2016 estimates), while President Bukele claimed in 2022 that there were 70,000 gangs in El Salvador alone; another source found in 2013 that 450,000 Salvadoreans were connected to gang members through family or other relationships.Footnote 106 According to the latest IISS Armed Conflict Survey, MS-13 in El Salvador has an estimated membership of 30,000 and operates in 93 per cent of the country’s municipalities.Footnote 107 In Honduras, MS-13 has around 9,000–15,000 full members and 40,000 recruits; whereas in Guatemala 2012 estimates indicated 22,000 gang members, with 5,000 associated with the MS-13 and 17,000 with the M-18.Footnote 108
In light of this structure, the territorial control exerted by Central American gangs is best understood by viewing the national territory as a spatial framework that delves into the complex power dynamics between the state and non-state actors.Footnote 109 The territory, in this sense, becomes a battleground over how much influence the non-state actor has over it in comparison to the state. To assert their power, Central American gangs exert control over local communities and marginalised neighbourhoods through their cliques, a form of dominance that undermines state capacities. They achieve this by extending their authority and influence not only over the people in these communities but also over the state itself.Footnote 110 They control key areas of the local economy, participate in public discourse as political actors, and oversee interactions with state representatives, including law enforcement.Footnote 111 Regarding the latter, several scholars have noted that due to corruption, impunity and mistrust in state institutions, police presence in gang-controlled communities does little to prevent or reduce violence.Footnote 112
Other aspects of gangs’ territorial control involve their method of establishing governance through a system of abuses and benefits. Abuses include restricting the population’s movement, instilling fear through physical and psychological coercion, and imposing economic burdens such as monetary penalties and taxes.Footnote 113 On the other side, the benefits offered are primarily limited to providing protection, whilst this ‘benefit’ imposes dangers on the population: the perception of gang affiliation.Footnote 114 In addition, there is an ‘economic return’ to the community: the support of families and businesses established within it.Footnote 115 Still, these gangs wield sufficient territorial control to enforce their laws and authority, but not enough to overthrow the government at a national level. Such a move would attract both national and international attention, jeopardising their advances and potentially destabilising the country, thereby negatively affecting their profits.Footnote 116
Extortion Crisis
In general, there is a consensus that the Central American gangs carry out economic activities of a local and transnational nature. Their sources of income come from drug transportation, human smuggling, murder-for-hire, kidnapping, money laundering, control of local drug markets and extortion.Footnote 117 The latter has become one of the most significant criminal enterprises and revenue sources for gangs in Guatemala, El Salvador and Honduras, leading to a widespread crisis due to its pervasive and systemic nature.Footnote 118
Known as ‘impuesto de guerra’ (‘war tax’) in Honduras and ‘renta’ in El Salvador and Guatemala, extortion has become a practice that has gained a sense of normality. For years, Central American gangs’ cliques across the Northern Triangle have used extortion against households, small business owners, transport workers, and self-employed people as a way to control urban territories, support incarcerated gang members, and pay their members (usually low) wages.Footnote 119 In certain instances, such as in the transportation sector and among market vendors, the payment of extortion has become a routine and even semi-formalised practice, with agreements established between merchants and gangs, sometimes involving the government.Footnote 120 Inherently, these activities are also accompanied by violent acts such as homicides, often as a direct consequence of failure to pay extortion fees.Footnote 121 Furthermore, the citizenry suffers retaliatory extortions from other actors, including gang imitators and corrupt officials.Footnote 122
Julia Yansura’s 2022 report on extortion in the Northern Triangle, based on available data from official sources and surveys, estimated that financial extortion exceeds US$1 billion annually.Footnote 123 There is US$40–57 million worth of financial extortion a year in Guatemala, US$52–72 million in Honduras, and US$1.05–1.1 billion a year in El Salvador, the country most affected by this type of crime.Footnote 124 Although the underlying data sources used for these estimates are not identical, Yansura’s report aligns with the findings on the high rates of extortion being exacted on small businesses by gangs and highlights the differing severity of the problem between countries.Footnote 125
As long as the Northern Triangle states – with the exception of El Salvador – fail to take effective action in gang-controlled areas, the problem of extortion will continue to worsen. In some cases, citizens have become so accustomed to making regular payments, either in cash or kind, that they no longer perceive it as extortion, while others who resist must contend with threats or violent consequences.Footnote 126 This normalisation of extortion among some citizens stresses the entrenched nature of the problem but, beyond this, gangs are also forced to adapt their methods based on local conditions, making it challenging to apply a single descriptive model to all MS-13 or M-18 factions.Footnote 127
Despite these complexities, studies have identified typical patterns in gang extortion. For example, in Honduras and El Salvador the extortion process involves identifying victims, setting payment amounts based on estimated revenues, notifying targets through threats, and escalating to violence if payments are not made, with lower-ranking members typically collecting the money in order to minimise the risk that higher-ranking gang members involved in directing the scheme will be caught by specialised police task forces.Footnote 128 Living under constant death threats and with no hope of relying on the state for protection, many see migration as their only option.Footnote 129 This shifts the extortion crisis into the larger context of the Central American migration crisis, as people flee to Mexico and the United States in search of safety.Footnote 130
In addition to mano dura policies, efforts to end the extortion crisis have centred on prevention programmes, strengthening national law enforcement structures and establishing specialised anti-extortion courts.Footnote 131 These initiatives aim to address the root causes of extortion by offering alternatives to gang involvement, improving law enforcement’s ability to respond, and creating a more efficient legal process for handling extortion cases. Unfortunately, despite their potential, these measures face significant obstacles due to poor coordination between government agencies – such as the police, prosecutors and judicial systems – and inadequate data collection, both of which hinder a full understanding of extortion dynamics and limit the ability to evaluate the initiatives’ success.Footnote 132
Exploring Theoretical Interactions between Central American Gangs and State Fiscal Functions
In this section, I will examine some common intersections between Central American gangs and state fiscal functions, focusing on the theoretical overlaps between extortion practices and formal taxation. This exploration is based on the understanding that individuals living in areas shaped by gang interactions are both actual and potential government taxpayers. As members of communities where gangs exercise territorial influence and impose extortion payments, they form perceptions of their extorted reality, which in turn shape their views on taxation and authority.
For this analysis, it is important to consider that gangs, through their criminal governance, act as fiscal authorities by imposing taxes whose legitimacy stems not from law, but from force and territorial control.Footnote 133 At the same time, we must acknowledge that the capacity of Northern Triangle states to exercise their taxing authority is constrained by their lack of territorial and citizen control in parts of the national territory.
Effects on Tax and Accounting Compliance
Anthony W. Fontes has described perfectly what extortion means for the common people in the following words: ‘Extortion transforms the city landscape, fractures communities, and infiltrates and warps everyday existence. Each victim experiences this fear and this destruction singularly.’Footnote 134 From the perspective of a person living in a gang-controlled area, there are many dilemmas to be encountered in their daily lives, moulded by the relationship between the gangs and the community.Footnote 135 Should they resist or should they cooperate with the gangs? Should they call the law enforcement authorities or stay quiet? In their role as taxpayers within the national tax system, these individuals may face an additional dilemma: should they comply with the formal tax obligations set by the state, or the informal tax demands imposed by the gangs?
This fiscal dilemma arises from a duopoly of coercion where opposing forces (the gangs and the state) impose two tax systems on the same subjects. Both systems, operating concurrently, tax individuals and corporations on the same income, presenting unavoidable intersections for those affected. Faced with limited income, taxpayers must decide whether to comply with both, one, or neither system, giving rise to a tax morale issue. What influences these taxpayers’ willingness or unwillingness to pay either type of tax, and how do violent coercion and state incapacity shape their decision? As explained earlier, the provision of security as an element of reciprocity between the state and the taxpayer carries weight in matters of tax compliance.Footnote 136
It can be assumed that individuals and businesses operating in such violent environments, where government responsiveness is noticeably lacking, may choose not to pay their formal taxes voluntarily.Footnote 137 With alternative coercive forces in play, taxpayers are likely to weigh the benefits and penalties of non-compliance, and to choose one authority over the other. Given the more severe penalties arising from tax non-compliance in the gang system, with death being the ultimate threat, there is an increased likelihood of tax evasion in the formal system.Footnote 138 Paying taxes to gangs leads to reduced investment, fewer jobs and diminished tax revenues for the national treasury.
From the state’s perspective, when taxpayers lack intrinsic motivation to fulfil their formal tax obligations, the government must rely more heavily on monitoring and compliance-control mechanisms, such as tax audits.Footnote 139 The question then arises as to how effective or even feasible such on-site reviews would be in gang-controlled communities. Given that gangs maintain a state of siege in these communities, monitoring residents’ identities, movements and visitors, the public officials responsible for any audits would be expected to be similarly targeted.Footnote 140 Limiting deployment for security reasons can undermine the tax administration’s authority during inspections, fostering a disregard for official institutions within the affected community.
Extortion also affects the way victims account for their businesses and assets. As Dean Neu notes in the context of El Salvador, both initial and ongoing extortion demands force business owners to alter their accounting decisions, as they consider its impact on profitability and cost structures.Footnote 141 Neu further emphasises that, in regions like the Northern Triangle, power dynamics extend beyond government regulations and accounting standards to determine control over assets.Footnote 142 Hence, individuals and business owners often hide assets to avoid or minimise extortion, likely also evading government oversight.Footnote 143 This creates challenges for both the state and the gangs in accurately assessing taxpayers’ true economic situations. However, gangs have an advantage over the state in their ability to uncover hidden assets as they exercise the most violent forms of coercion and have closer proximity to their targets within their territories.Footnote 144
Taxpayer migration due to the burden of extortion introduces further challenges related to tax compliance, more accurately described as a loss of the taxpayer base. When someone is forced to flee their country to escape gang violence, they are also leaving behind the fiscal community to which they belong – a community where they have been systematically and continuously subjected to the formal tax system.Footnote 145 Abandoning one’s home, permanent residence or centre of vital interests – key factors that determine tax residency – thus results in a loss of tax revenue that cannot be recovered through exit taxes, which are imposed when a person ceases to be a tax resident of a country due to relocation or other circumstances.Footnote 146 The inability to impose exit taxes is attributed to the irregular nature of such migration, often seen in caravans heading to Mexico and the United States, as well as to the migrants’ lack of trust in state institutions, and other contributing factors.Footnote 147
Tax Cooperation through Hybrid Governance
In the past, Central American gangs have been recognised by the state as political actors. Of the three countries in the Northern Triangle, it was El Salvador that formalised a truce lasting three years (2012–14), during which MS-13 and M-18 agreed to a ceasefire to reduce homicides in exchange for improved prison conditions.Footnote 148 This truce, which mirrored the ceasefire happening further south with the Fuerzas Armadas Revolucionarias de Colombia (Revolutionary Armed Forces of Colombia, FARC), was short-lived and ineffective. In an unintended consequence of this failed peace effort, the gangs became actors capable of negotiating and enforcing agreements and publicly communicating decisions and orders to the rest of the population.Footnote 149
Although society may resist recognising gang members as influential stakeholders, such events raise the question of whether the state might engage with them in other areas, such as the implementation of the tax system, giving rise to a system of hybrid governance.Footnote 150 This can involve collaboration between states and non-state actors in administering formal and informal taxes.Footnote 151 While unconventional, there are precedents where governments have considered leveraging non-state actors for tax collection. A recent example occurred in Nigeria, where Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, raised the possibility of hiring and training local gang members, known as ‘area boys’, to assist in tax collection on behalf of the government.Footnote 152
Nonetheless, extending dialogue between gangs and the government to include fiscal matters introduces new avenues for corruption. Generally speaking, corruption in the tax administration relies on the willingness of tax authorities and taxpayers or their intermediaries to engage in illicit activities, such as bribery.Footnote 153 Thus, introducing a non-state actor with fiscal authority into the formula, especially one whose coercive methods are rooted in violence, adds another complex layer to the relationship between the state and taxpayers. One can theorise new forms of bribery where taxpayers collaborate with non-state actors to reduce their tax obligations to the state. Likewise, government officials and non-state actors might collude in new forms of embezzlement. In short, the potential for corrupt practices in the field of taxation becomes broader than it currently is.
Recognition in the Tax System
Various tax scholars have explored biases in tax law and enforcement, often focusing on race, ethnicity and gender.Footnote 154 These analyses primarily examine how legal frameworks, administrative processes and compliance burdens result in unequal outcomes for individuals with specific personal characteristics. However, in the context of the Northern Triangle, the duopoly of coercion places significant pressure on members of affected communities, and addressing the resulting unfair consequences requires their recognition in the tax system. In other words, tax rules of Northern Triangle countries should not be socially blind to the challenges faced by taxpayers in gang-controlled areas.Footnote 155
Essentially, the state’s tax system is not expected to acknowledge the extortion practices of gangs, as state laws oppose illegal activities rather than legitimising them. For instance, in the Northern Triangle, the countries’ criminal codes penalise extortion, reflecting the states’ intention to undermine the coercive power of criminal groups through legal mechanisms.Footnote 156 It would be unusual for a tax system to account for the effects of criminal activity, as these are presumed to be addressed through the rule of law. In an ideal scenario, Central American states would swiftly intervene to prevent gangs from seizing taxpayers’ income through criminal jurisdiction. So far, this has not been the case in the Northern Triangle, where gang extortion has persisted for decades. However, I argue that an acknowledgement of gang extortion in tax law does not legitimise extortion. Rather, it recognises the economic hardship created by living and operating under gang control. Tax systems have, in other contexts, adjusted ordinary rules in response to extraordinary circumstances that place extraordinary pressure on taxpayers. A recent example is the COVID-19 pandemic, during which special circumstances that increased fiscal pressures on the population were recognised, prompting the implementation of targeted tax relief policies in response.Footnote 157 It would not be unreasonable similarly to consider acknowledging through tax law that a portion of the population lives under a distinct reality shaped by their direct experiences with extortion, in contrast to those who are unaffected.
For instance, what happens when two people, earning the same net income on paper, have different living conditions – one residing in a gang-controlled area, while the other does not? Let us consider a hypothetical scenario: Person A and Person B, independent professionals working in San Salvador with a net income of US$30,000, would pay taxes according to the same income tax scales, as outlined in the Income Tax Law of 1991 (since updated).Footnote 158 Although both have the same net income, Person A resides in an area under M-13 control, while Person B lives in an area that is not controlled by gangs. Person A pays extortion taxes to the gang while Person B does not, but the tax law does not acknowledge these disparities in their social circumstances. Fundamentally, the income of a person living in gang-controlled territory is subject to two separate tax systems and, if they are forced to comply with both, they are subject to a quasi-juridical form of double taxation. The severity of the situation is worse in the case of individuals and businesses facing multiple demands from different gangs.Footnote 159
Another hypothetical scenario, as seen in the transport sector, relates to workers who are directly affected by extortion when companies deduct extortion fees directly from their pay cheques.Footnote 160 Under these schemes, companies serve as intermediaries or ‘withholding tax agents’ for the gangs, and are thereby compelled to adjust their internal practices to navigate around extortion. When a company offsets the loss in gross profits due to extortion by deducting it from employees’ salaries, the workers are impacted. The key issue is that this extortion payment is not tax-deductible under current regulations, further compounding the burden on both businesses and employees.
The situations described above are cases where tax legislation in the Northern Triangle fails to account for the fact that residents – both individuals and businesses – are forced to make payments to third parties (the gangs) in order to conduct their personal and economic activities ‘peacefully’. These payments are not recognised as tax credits against formal taxes nor as deductions from taxable income by the state (unless disguised as a deductible expense, given the difficulties of formally documenting extortion payments).Footnote 161 Consequently, there is no tax mechanism to alleviate this informal form of taxation. In turn, the question arises whether the formal tax system should adopt a pecunia non olet (‘money does not stink’) approach to these payments, considering them within formal tax rules as a means of support for certain taxpayers unable to escape the duopoly of coercion, or whether this would be construed as an admission of state failure.
Lastly, it remains uncertain whether the intersection of these two tax systems might influence the legal defences available to a taxpayer facing taxation from gangs and the state. For instance, an individual might lack the cash liquidity to meet formal fiscal obligations due to gangs’ extortion. Can the taxpayer invoke fortuitous events or force majeure when the local tax administration demands payment? Similarly, can the taxpayer argue non-payment of the formal tax due to financial calamity, invoking lex non cogit ad impossibilia (‘the law cannot demand the impossible’)? In 1903, arbitration cases before the Italian–Venezuelan and British–Venezuelan Commissions established that the loss of national territory resulted in a permanent loss of the state’s taxation authority.Footnote 162 This precedent entitled individuals subjected to taxation by revolutionary groups to a refund of taxes paid to the government if they were collected during periods when the state lacked territorial control. Could the taxpayers affected by the gangs request a refund of this type for the entire time they were affected? At least so far, tax laws in the Northern Triangle have not addressed any instance where an individual might be compensated or unable to fulfil a duty due to prolonged state failure to provide security for its inhabitants.
Conclusions
The concept of tax sovereignty, typically viewed as the state’s exclusive authority to impose and collect taxes within its territory, is significantly challenged in areas where criminal organisations impose their own forms of taxation through extortion. These informal taxation systems are illegal and lack legitimacy under the rule of law. Nonetheless, their economic impact fundamentally places them in the category of a tax, and the authority of the non-state armed actors, which influences individuals’ decisions to comply or resist them, shapes a perceived legitimacy. Gangs in the Northern Triangle exert territorial control, impose financial burdens and influence economic behaviour in ways that mirror state fiscal functions – resulting in problems such as double taxation scenarios. Hence, the intersection of taxing powers in territories dominated by this form of criminal governance reflects a condition of contested and divisible sovereignty. At present, these challenges remain largely unaddressed by existing tax legislation.
Given the overlap between criminal and state tax governance, social scientists should further incorporate the dynamics of taxation into their empirical work. Understanding how criminal governance operates alongside state fiscal institutions can provide critical insights into the lived experiences of people in these regions. It would also highlight how coercive power is exercised and maintained not just by the state but also by non-state actors, who impose their own systems of informal tax governance. This article therefore advocates for incorporating these theoretical insights into the fieldwork of social scientists to better assess how the duopoly of tax authorities influences the lives of affected populations. By doing so, one can develop a more comprehensive and realistic framework for understanding and addressing the challenges of taxation in contexts of contested sovereignty and territoriality.
Tax scholars have devoted significant effort to providing policymakers with insights into equality and justice within tax systems. This endeavour, which could be considered as never-ending, relies on concepts and principles rooted in the rule of law as guiding benchmarks. However, this focus has perpetuated the framing of scholarship within traditional assumptions about tax sovereignty and territoriality, assumptions that portray idealised scenarios in which the state retains full control and a monopoly on legitimate force – something factually inaccurate in jurisdictions where criminal governance looms large. In Latin America alone, it is estimated that between 77 and 101 million people live under criminal governance, suggesting that the fiscal issues arising from such governance are likely to be significant in scale.Footnote 163 Tax scholars and policymakers examining conflict-affected jurisdictions must critically reassess how traditional tax concepts are challenged in contexts where state fiscal functions face competition, and scrutinise the layered realities of taxpayers living under such circumstances.
Acknowledgements
The author would like to thank Wolfgang Schön and his other collaborators at the Max Planck Institute for Tax Law and Public Finance for their valuable support and comments on an earlier version of this article. The author also extends gratitude to Max Planck Law and the organisers of the 2023 Max Planck Law Annual Conference for the opportunity to present an early draft of this work. Finally, heartfelt gratitude goes to the editors and reviewers of this piece, whose comments served as guiding lights during the refinement of each draft.
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