Taxation and Government Quality: The Size, the Shape, or Just Europe 300 Years Ago?

Abstract

Based on historical research, focusing mainly on early-modern Europe, it is assumed that taxation functions as a booster of state capacity and Quality of Government (QoG). The presence of this relationship for modern-day developing states is however heavily contested. This paper analyzes the relationship in a sub-Saharan context. By using new taxation data, which disaggregates resource income from other types of taxation (drawn from African Economic Outlook [2010]) we can with greater specificity dissect the different effects of different types of taxation. Through a multivariate regression analysis the paper shows that taxation, and in particular direct and indirect taxation, as a share of GDP seems to be associated with higher levels of QoG, although this relationship is at times weak. Furthermore, the relative dependence on direct and, to an extent indirect, taxation, measured as its share of the total tax base is shown to be more consistently coupled with better QoG. Thus, the paper concludes, more research on the importance of both size and shape of the tax base is warranted and needed.