Power-Sharing and Income Taxation in Non-Democratic States

Income tax is an important part of modern tax systems and it has substantially in- creased states’ fiscal capacity, but its political origins are still debated. The evolution of taxation over the last two centuries is commonly explained by warfare, redistribution, and democratization. However, many income taxes were in fact introduced by non-democratic governments in peace time. In this paper I argue that income tax adoptions in non-democratic contexts are investments in fiscal capacity, not a means for redistribution. Institutions implemented to solve commitment problems between ruler and elite in the face of a challenge to the regime – such as parliaments – are also useful in solving commitment problems common in tax policy. Institutionalized power-sharing ensures the elite of future influence, and thus reduces the risk of investing in state capacity. The empirical implications are straight-forward: income taxes are more likely to be introduced in non-democratic states with power-sharing institutions. I find support for this prediction by analyzing several new, high quality, historical datasets over political institutions, the introduction of taxes, and government tax revenue, covering as many as 88 countries over two centuries.