Geography and Capacity

Capacity to collect taxes is crucial to functioning of the state, economic development, and redistribution.  We examine differences in economic geography, whether productive factors are dispersed across the nation or spatially concentrated, and development of national tax capacity. We predict higher tax capacity with greater dispersion of economic factors, reflecting competition across sectors and relative equality in regional productivity.  With regional competition and economic parity, locations and elites can share the costs and the benefits of a functional state.  Greater concentration of economic factors, however, lays the burden of taxes on a limited geographic area, a small number of economic sectors, and few elites.  Because taxation implies redistribution from these areas to the rest of the nation, we do not expect investment in tax capacity. We also anticipate an interactive relationship between economic geography and industrialization type.  Where industrialization occurred under open markets, non-agricultural regions could compete with physical and human capital, increasing the regional parity of nations with dispersed factors, and distributing the tax burden.  Where industrialization was controlled by governments, such as in Import Substitution Industrialization, we expect continuity in the effects of economic geography as the same regions are rewarded with the gains of industrialization. Concentrated factors should continue to depress incentives to tax effectively. In a large cross-national dataset of developed and developing nations, we find strong evidence that economic geography and regional inequality affect the level of tax capacity, measured as total tax collection and extraction from the income tax.