Democracy and Taxation of Labour and Capital in Developing Countries

The article examines the effect of democracy on the evolution of taxation in developing countries through the lens of factor income. Employing a range of quantitative methods and using extensive macroeconomic and political data from more than 100 countries between 1970--2018, I find strong evidence that democracy leads to higher tax revenues from capital. In line with insights from the welfare state literature, I also show that democracy tends to have a positive impact on revenues from the personal income tax but its effect on social security contributions is inconclusive, underlying an overall weaker relationship between democracy and labour taxation. These findings enhance our understanding of the channels through which democracy shape fiscal capacity building. More broadly, the results also shed new light on the ongoing debate about the performance of democracy in the developing world by illustrating its positive impact on the revenue-raising capacity of the state.