The International Origins of Fiscal Extraction

This paper examines the relationship between interstate relations and the development of fiscal systems from 1820 to the present. We focus in particular on the effects of a state's security environment (interstate wars, military rivalries and international security alliances) on its levels of fiscal extraction. We argue that security environments affect taxation by either changing the demand for greater investments on national security or by affecting the costs of external defence. Political institutions condition those effects, since they determine how sensitive states are to the demands of the citizenry and who benefits from lowering the costs of providing national security. This means that, in the short-term, autocracies are able to raise more taxes in response to rivalries, especially if they have powerful international allies. However, those tax increases are short-lived and do not lead to greater fiscal capacity in the long-run. Conversely, democracies are less sensitive to rivalries, especially if they can outsource their security needs to foreign allies. However, in the face of actual war, democracies are able to raise more taxes than autocracies, and those transformations tend to be more permanent. We find evidence in support of these predictions through a series of cross-section time-series models of a large sample of countries from 1820 to 2006, as well as several "legacy models" that predict contemporary levels of taxation based on each state's history of interstate relations.