Tariffs and State Capacity: A Specific Example

Evasion is a key obstacle to raising customs revenue. We study how improved administrative capacity enables governments to combat evasion by redesigning tariff codes. Using newly compiled historical records from the Early American Republic, we show that as Customs administration matured, the tariff code became more complex and more reliant on specific (quantity-based) tariffs in preference to ad valorem (value-based) ones. We develop an equilibrium model of tariff administration with costly verification of declared values that explains these twin trends: Administrative capacity allows Customs officials to disaggregate goods and assess tailored specific tariffs, obviating misvaluation while minimizing price distortions. The model successfully predicts several additional empirical patterns: Specific tariffs tend to be assessed on goods that are homogeneous, cheap, or lightly taxed.