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ANYONE who has traveled in poor areas of poor countries cannot help but notice the palpable absence of government-the dearth of roads, hospitals, and even basic sanitation in many cases. The absence 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.1
Using a simple model of taxation, I show that if enforcing tax compliance 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 variations in social preferences and if states have different tax instruments, they can cut separate deals with different groups, much like discriminating monopolists. And by acting as discriminating monopolists, states are able to maximize their revenue; in return, however, they accept serf-enforcing limits on their ability to redistribute to themselves and among groups of citizens. As a result, the people who pay for government 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 following empirical assumptions: (1) lower-income groups especially want the state to provide basic public services and improve social welfare, while upper-income groups covet property rights; and (2) "regressive" taxes are a good proxy for taxes on the poor, while "progressive" taxes are a good proxy for taxes on the wealthy. Controlling for a variety of factors, my results show that the more money a state raises from regressive taxes as a percentage of GDP, the longer the average life expectancy, the higher immunization rates, the lower infant mortality, the more it spends on public health, and (within the OECD) the greater total social spending. The more money a state raises from progressive taxes as a percentage of GDP, by contrast, the better it protects property rights. The...