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Why did people pay taxes? Fiscal innovation in Portugal and state making in times of political struggle (1500-1680)

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  • Leonor Freire Costa
  • Paulo Brito

Abstract

This paper considers growing fiscal capacity of the European early modern states as contingent to taxpayer’s consent in higher tax loads. It puts forward the hypothesis that war damages were the main factor guiding the taxpayer’s cost-benefit assessment of consenting or violently resisting to a fiscal innovation. To test the hypotheses, we consider data on Portugal in times of political struggle against the Habsburgs to restore and keep the political autonomy after 1640. The war was financed by an entirely new, universal income tax, remaining in the Portuguese fiscal system well until the liberal revolution in 1820, although enforced by a decentralized and nonspecialized administration. A model derives the optimal tax rate from the standpoint of the taxpayer as a function of war intensity, risk aversion, and awareness that evasion would enhance war damages. Data on damages, contemporary assessments of the tax base, and amounts enforced allow the model’s calibration. Results suggest the accuracy of the hypothesis and draw the conclusion that taxpayers’ utility in paying the new tax determined the e?ective tax rate (tax enforced). This paper claims that ultimately improvements in the fiscal capacity of states needed taxpayer’s perception of high levels of destruction, hence any political regime in early modern Europe must have found in war damages a persuasive argument to make e?ective a fiscal innovation. The other contribution of this case study is pointing out the advantage of the assignment of the tax collection to local, non-professional administration, for the endurance of a fiscal system, which incorporated an income tax that withstood the liberal revolution. It enhanced the role of peer monitoring and turned out to be an e?ective way of instilling social norms contributing to build up the taxpayer’s liability, which somehow the liberal state in 19th century exploited within a di?erent technological environment.

Suggested Citation

  • Leonor Freire Costa & Paulo Brito, 2018. "Why did people pay taxes? Fiscal innovation in Portugal and state making in times of political struggle (1500-1680)," Working Papers GHES - Office of Economic and Social History 2018/59, ISEG - Lisbon School of Economics and Management, GHES - Social and Economic History Research Unit, Universidade de Lisboa.
  • Handle: RePEc:ise:gheswp:wp592018
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    Cited by:

    1. Elena Korchmina, 2018. "Peer Pressure: The Puzzle of Tax Compliance in the Early Nineteenth-Century Russia," Working Papers 0144, European Historical Economics Society (EHES).

    More about this item

    Keywords

    Portugal; early modern economies; income tax; state capacity JEL classification: N13; H31; H26;

    JEL classification:

    • N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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