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57 World Pol. 530 (2004-2005)
The Fiscal Contract: States, Taxes, and Public Services

handle is hein.journals/wpot57 and id is 577 raw text is: THE FISCAL CONTRACT States, Taxes, and Public Services By JEFFREY F. TIMMONS* KNYONE who has traveled in poor areas of poor countries cannot elp but notice the palpable absence of government-the dearth of roads, hospitals, and even basic sanitation in many cases. The ab- sence of tax collectors may be less conspicuous but is just as important, according to the theory developed and tested in this article. Building on the neoclassical theory of the state and the tax morale literature, I argue that governments have pecuniary incentives to cater to taxpayers, thereby encouraging an overlap between the distribution of taxes and the distribution of public benefits.' Using a simple model of taxation, I show that if enforcing tax com- pliance purely through force is costly and if there is some probability that citizens respond to government demands for taxes based on their evaluation of government performance, then states have incentives to trade services for revenue. Furthermore, if there are systematic varia- tions in social preferences and if states have different tax instruments, they can cut separate deals with different groups, much like discrimi- nating monopolists. And by acting as discriminating monopolists, states are able to maximize their revenue; in return, however, they ac- cept self-enforcing limits on their ability to redistribute to themselves and among groups of citizens. As a result, the people who pay for gov- ernment obtain the bulk of its benefits. I test this hypothesis against rival hypotheses using cross-sectional data from approximately ninety countries from 1975 to 1999 and panel data from eighteen OECD countries from 1975 to 1995, based on the * Special thanks to Gary Cox, David Lake, Peter Gourevitch, Pablo Pinto, Eric Magar, Margaret Levi, Peter Lindert, Neal Beck, and three anonymous referees for their assistance along the way. A previous version of this paper was presented at the annual meeting of the American Political Science Association, Chicago, September 2004. All errors are mine. 'See Douglass C. North, Growth and Structural Change (New York W. W. Norton, 1981); Robert H. Bates and Da-Hsiang Donald Lien, A Note on Taxation, Development, and Representative Gov- ernment, Politics and Society 14 (March 1985); and Margaret Levi, Of Rule and Revenue (Berkeley: University of California Press, 1988). For tax compliance, see James Andreoni, Brian Erard, and Jona- than Feinstein, Tax Compliance,Journal ofEconomic Literature 36 (June 1998). World Politics 57 (July 2005), 530-67

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