Democracy, Urbanisation and Tax Revenue

During the last two centuries, taxation has not only increased dramatically in levels and volumes; its structure has also changed. From a heavy reliance on custom revenue in the early nineteenth century to a heavier emphasis on income taxation in the twentieth. To explain the development of modern taxation systems, this paper focuses on political institutions and on the geographic concentration of tax payers. The paper argues that the effect of democratization on tax structure is mediated by administrative costs and political preferences. A tax that is costly and difficult to collect will not be long-lived. With the introduction of democracy, the tax structure also depends on preferences among the voters. These preferences are in turn affected by place of residence. For example, rural farmers have different preferences over taxation than urban manufacturing employees. The paper uses a novel dataset that provides information about government tax revenue in thirty countries in Europe, the Americas, Oceania and Asia -- from as far back as 1800 until today -- in order to evaluate the conditional impact of democratization on the tax structure. Including countries outside of Europe decreases the impact of region-specific events such as World War I. The results show that democracy decreases property taxes in rural countries while it increases income taxes and decreases excise and consumption taxes in more urbanized states. These results are robust to a number of controls, such as interstate warfare, and to several alternative measurements of democracy.