David Lagakos, Boston University

"Quantifying the Importance of Tax Collection Capacity for Development"


Economists have long emphasized the importance of `state capacity’ for economic development. Central to the concept of state capacity is the ability to collect taxes effectively. This paper draws on new cross-country evidence on productivity in tax collection to help quantify the importance of tax collection capacity in determining a nation’s income level. We document that tax revenues per dollar spent on tax collection are around six times higher on average in the richest countries than in the poorest ones. We interpret this finding through the lens of a dynamic general equilibrium growth model in which public capital complements private capital in the production function, and tax collection capacity drives the long-run level of public capital provision. Quantitatively, the model is consistent with the higher income tax exemptions and lower tax revenues per dollar spent on tax administration observed in the poorest countries. The model predicts that increasing the tax collection capacity of the world's poorest countries to the U.S. level would raise their income per capita substantially.

(Joint work with Radhika Goyal and Anders Jensen) 

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