How Do Political Institutions Affect Fiscal Capacity? Explaining Taxation in Developing Economies

Effective States and Inclusive Development Working Paper No 59

39 Pages Posted: 7 Sep 2016 Last revised: 12 Mar 2018

See all articles by Roberto Ricciuti

Roberto Ricciuti

University of Verona - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Antonio Savoia

University of Manchester - Global Development Institute

Kunal Sen

University of Manchester

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2016

Abstract

A central aspect of institutional development in less developed economies is building tax systems capable of raising revenues from broad tax bases, i.e., fiscal capacity. While it is recognised in the literature 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 identify their long-run impact and we ‘unpack’ the concept of fiscal capacity, 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. The impact of political institutions on the impartiality dimension works through the rule of law and the performance of the bureaucracy.

Keywords: state capacity, fiscal capacity, governance, institutions, economic development

Suggested Citation

Ricciuti, Roberto and Savoia, Antonio and Sen, Kunal, How Do Political Institutions Affect Fiscal Capacity? Explaining Taxation in Developing Economies (July 1, 2016). Effective States and Inclusive Development Working Paper No 59, Available at SSRN: https://ssrn.com/abstract=2835498 or http://dx.doi.org/10.2139/ssrn.2835498

Roberto Ricciuti

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Antonio Savoia (Contact Author)

University of Manchester - Global Development Institute ( email )

Arthur Lewis building
Oxford Road
Manchester, M13 9PL
United Kingdom

Kunal Sen

University of Manchester ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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