DP14981 Threat of Taxation, Stagnation and Social Unrest: Evidence from 19th Century Sicily

Author(s): Gema Lax-Martinez, Dominic Rohner, Alessandro Saia
Publication Date: July 2020
Keyword(s): conflict, Fiscal, growth, regression discontinuity design, state capacity, taxation, Unrest
JEL(s): D74, H20, H26, J10, N43, O10
Programme Areas: Public Economics, Development Economics, Economic History
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14981

Taxation may trigger social unrest, as highlighted by historical examples. At the same time, tax incomes could boost state capacity which may in turn foster political stability. Understanding better the a priori ambiguous taxation-turmoil nexus is particularly relevant for low-income countries today -- yet unfortunately any causal evidence on this has been very scarce. We exploit a unique policy experiment in 19th century Sicily to identify with the help of a regression discontinuity design (RDD) the effect of taxation on social unrest. It turns out that it is mostly the threat of taxation that may distort economic investment and ultimately result in higher levels of political turmoil.