The Fiscal Origins of Comparative Inequality levels: An Empirical and Historical Investigation

What explains exceptional inequality across Latin America, Africa, and India? By exploiting analytical, historical, and empirical tools, this paper revisits the literature on development and inequality. The results confirm the neoinstitutionalists emphasis on executive checks but challenge the primacy given to market over fiscal mechanisms. The study also shows that extreme inequality in these regions does not originate in colonial times, but rather in a post-colonial Great Divergence in fiscal capacity between Peripheral and Western states. The empirical model that revises Acemoglu et al. (2001) instrumental variable (IV) method, consistent with historical evidence, indicates that inequality differences only materialised during the 20th century following divergent fiscal patterns. In Western nations, progressive fiscality led to tangibly lower inequality since the 1920s. Whereas in Latin America, Africa, and India, despite a post-colonial convergence to a more inclusive economic terrain, significant inequality persists via a regressive fiscal equilibrium. In the Periphery, while limited democratic checks have not impeded post-colonial states from tackling the remnants of their colonial-era extractive economic system (seen as a drag on development), it severely undermined the (I) formation of the states credible commitments needed to raise substantial direct (i.e., more progressive) taxes, and (II) the political pressure required to mobilize fiscal revenue toward redistribution. These two factors explain roughly 70% of the inequality difference between Peripheral countries and the highly redistributive Western ones. Thereby, by overstating the role of divergent and persistent economic institutions (via colonialism), the literature overlooked the crucial role played by post-colonial changes and fiscality in shaping contemporary inequality.