Taxability, Protection, and the State

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Title: Taxability, Protection, and the State
Creators: Gehlbach, Scott
Keywords: tax
Issue Date: 2004-11-19
Publisher: Ohio State University. Mershon Center for International Security Studies
Series/Report no.: Mershon Center for International Security Studies. Political Economy Speaker Series
Abstract: The state,writes Douglass North, trades a group of services, which we shall call protection and justice, for revenue. This paper explores the possibility that an efficient trade may not be possible, while providing an explanation for variation in the degree to which such protection is provided. At issue is the fact that the revenues which in principle could justify the ex ante provision of protection are typically collected ex post. Protection having been provided, firms may therefore have an incentive to hide revenues from the state, while differing in their ability to do so. Thus, the state will typically favor economic activity which is more taxable,a proposition supported by data from a survey of firms in 25 postcommunist countries. Perhaps surprisingly, such discrimination may exist even when a state with commitment power can deter revenue hiding by promising to leave firms with a share of their unhidden production.
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