Contrary to intuition, one of the most significant expansions of the capacity to tax - the introduction of broad based income taxation - took place under the auspices of non-democratic systems. We hypothesize that wealthy elites in non-democratic systems only supported the establishment of income taxes in systems in which their political influence was secured through institutional restrictions, even if the franchise was expanded significantly later on. Such anti-democratic institutional restrictions, including malapportionment, bicameralism, suffrage limitations, and the open ballot, ensured the continued outsized influence of a small segment of society over policy decisions well into the future, and sometimes until today. To test our predictions, we present a new dataset on the timing of tax innovations and the composition of central government tax revenues for 33 countries in Europe and Latin America starting in 1800 (or independence) until today. We find that institutionalized dominance of elite preferences through biased democratic institutions significantly reduces revenue collection by the state. This effect dissipates over time, but remains for several decades after the introduction of new income tax laws. The dampening effect of elite-biased institutions on tax revenue collection remains even after the introduction of full suffrage.
Further data collection on the extent of tax administrations in a subset of these 33 countries is currently underway. With additional information on the number of employees of the federal revenue services and expenses of the finance ministry we will be able to differentiate under which conditions governments invested in and expanded fiscal capacity or instead passed income tax laws without such necessary administrative improvements.
