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Tax Morale, Fiscal Capacity, and Wars

Author

Listed:
  • Alessandro Belmonte

    () (IMT School for advanced studies)

  • Désirée Teobaldelli

    () (University of Urbino)

  • Davide Ticchi

    () (Marche Polytechnic University)

Abstract

This paper studies how mobilization for war motivates citizens to contribute to their own community and therefore help forming tax morale in a constituency. We derive a theoretical model to investigate government's decision to expand tax revenues from alternative sources, namely changing the country's culture of tax compliance or expanding fiscal capacity. Despite the two are initially substitute, we show how in equilibrium dynamic complementarity arises. Our mechanism exploits exogenous variation in the cost of tax morale formation, induced by an expected war (either internal or external) that makes easier for the government to mobilize the constituency. We motivate our theory through a novel cross-country analysis that uses information on war frequency, tax morale, and fiscal capacity. We additionally discuss some historical cases consistent with our mechanism.

Suggested Citation

  • Alessandro Belmonte & Désirée Teobaldelli & Davide Ticchi, 2018. "Tax Morale, Fiscal Capacity, and Wars," Working Papers 03/2018, IMT Institute for Advanced Studies Lucca, revised Feb 2018.
  • Handle: RePEc:ial:wpaper:3/2018
    as

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    File URL: http://eprints.imtlucca.it/3894/1/EIC_WP_3_2018.pdf
    File Function: First version, 2018
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    References listed on IDEAS

    as
    1. Mark Dincecco & Mauricio Prado, 2012. "Warfare, fiscal capacity, and performance," Journal of Economic Growth, Springer, vol. 17(3), pages 171-203, September.
    2. Timothy Besley & Torsten Persson, 2009. "The Origins of State Capacity: Property Rights, Taxation, and Politics," American Economic Review, American Economic Association, vol. 99(4), pages 1218-1244, September.
    3. Halla Martin, 2012. "Tax Morale and Compliance Behavior: First Evidence on a Causal Link," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-27, April.
    4. Gorodnichenko, Yuriy & Roland, Gérard, 2015. "Culture, Institutions and Democratization," CEPR Discussion Papers 10563, C.E.P.R. Discussion Papers.
    5. Lago-Peñas, Ignacio & Lago-Peñas, Santiago, 2010. "The determinants of tax morale in comparative perspective: Evidence from European countries," European Journal of Political Economy, Elsevier, vol. 26(4), pages 441-453, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    tax morale; state capacity; external threat; civil wars; dynamic complementarity; culture and institutions;

    JEL classification:

    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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