Taxation and democracy: an instrumental variable approach

Abstract

Our article investigates the effect of taxation on democracy. We exploit exogenous variation in taxation driven by wars from the pre-modern era and document a positive and highly significant first-stage relationship between pre-modern war casualties and taxation. Using this instrumental variable strategy, we find that taxation has a positive effect on democracy.

Keywords:

• tax revenue
• democracy
• instrumental variable
• casualties

JEL Classification:

• H10
• P16

Notes

¹ This data can be downloaded from the following website: https://sites.google.com/site/mdincecco/

² To account for country size, we include area as an additional control variable in our 2SLS regressions.