Taxation and Democratization

• This paper studies the effect of taxation on democratization.
• The dataset covers 122 countries over the period 1981–2008.
• The government revenues to GDP ratio is used as a proxy for taxation.
• Instruments for government revenues are value added taxes and autonomous revenue authorities.
• The results suggest that taxation has a positive effect on democratization.

SummaryAnecdotal evidence from pre-modern Europe and North America suggests that rulers are forced to become more democratic once they impose a significant fiscal burden on their citizens. One difficulty in testing this “taxation causes democratization” hypothesis empirically is the endogeneity of public revenues. I use introductions of value added taxes and autonomous revenue authorities as sources of quasi-exogenous variation to identify the causal effect of the fiscal burden borne by citizens on democracy. The instrumental variables regressions with a panel of 122 countries over the period 1981–2008 suggest that revenues have on average a mild positive effect on democracy.