I present a theory of the development and consolidation of fiscal capacity, defined as the state's capacity to tax private income. The theory acknowledges the use of protectionist policy as a means to raise tax revenue when fiscal capacity is weak. From this starting point, I evaluate the conditions under which tax revenue derived from protectionist policy is re-invested in enhancing the fiscal capacity of the state. The analysis suggests that re-investment ultimately depends on the initial conditions of the economy and the extent of policy capture in the political system. The theory is developed in two steps. In the first part of the dissertation, I identify the conditions under which protectionist policy is granted in exchange for higher tax abidance by domestic industry. The analysis suggests that the initial endowment of fiscal capacity as well as the productivity of domestic industry must be simultaneously low for this institutional solution to be an equilibrium. The predictions derived from the theoretical analysis are tested twofold, using cross-national and country-specific data. The second part of the dissertation evaluates the conditions under which the additional tax revenue derived from protection for tax compliance is reinvested in extending the fiscal capacity endowment of the economy. The results suggest that protection for tax compliance is detrimental for states whose state capacity is too weak or too strong to begin with but optimal for intermediate levels. For intermediate values only, economies endogenously switch from a protectionist equilibrium with low fiscal capacity and obsolete industry to a free-trade equilibrium with high fiscal capacity and competitive industry. On the contrary, if protection for tax compliance is adopted when fiscal capacity is too weak (or policy capture is pervasive), no re-investment takes place and the economy eventually falls in a poverty trap characterized by weak fiscal capacity and obsolete industry. Overall, protection for tax compliance is proved to maximize aggregate welfare in the short- and long-run only when the initial stock of fiscal capacity is intermediate. Ultimately, the theory presented in this dissertation emphasizes the role of political survival inter-temporal dilemmas once applied to state capacity building.
|Commitee:||Beck, Nathaniel, Mares, Isabela, Satyanath, Shanker, Stasavage, David|
|School:||New York University|
|School Location:||United States -- New York|
|Source:||DAI-A 74/04(E), Dissertation Abstracts International|
|Subjects:||Economics, Economic history, Political science|
|Keywords:||Endogenous institutions, Fiscal capacity, Political economy, State capacity, Tax compliance, Weak state|
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