Party System Institutionalisation and Progressive Taxation in Developing Countries

This paper explores the effect of party system institutionalisation on the collection of personal income tax. Based on a fiscal contractualism approach, I argue that institutionalised political party systems increase the credibility of political actors to commit to fiscal exchange agreements. As a result, in countries characterized by institutionalised political party systems wealthier taxpayers accept to pay a higher share of the tax burden, which mirrors in a higher relevance of progressive tax types. The analysis of panel data for over 90 countries from 1990 to 2010 shows that party system institutionalisation has a especially significant and strong positive effect on the relevance of the personal income tax at low levels of bureaucratic capacity. At high levels of bureaucratic capacity the effect disappears. The findings strongly support the claim that particularly in developing countries, where bureaucratic capacity tends to be limited, taxation is best understood as a problem of credible commitment.