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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