Besley and Persson (2012) present a list of "stylized facts" that describe the evolution and patterns of fiscal capacity.
The strength of a state's fiscal capacity is thus determined by not only the amount of revenue collected, but also influenced by the efficiency of its tax structure.
[1][4][6] Low fiscal capacity is typically a consequence of underdeveloped political, social and economic conditions in a state.
), different tax structures can reflect varying preferences for private versus public goods, and redistribution.
In 2000, Friedrich Schneider and Dominik Enste estimated that the size of "the informal economy on average is only about 15% of GDP among OECD countries...
In other words, whether or not citizens choose to participate in the informal economy today depends strongly on the conditions and choices made by policymakers of the past.
Gordon and Li (2009) demonstrate that because the financial sector is important in developed countries, businesses will choose to use banks and not evade taxes.
Comparatively, the financial sector may be weaker in developing countries and businesses may have less incentive to use the banking system and instead opt to use cash.
As is such, Gordon and Li (2009) conclude that "as the financial sector improves in effectiveness, more firms will be pulled into using it in spite of the tax implications of doing so".
[4][6] For instance, the Internal Revenue Service is an example of a strong tax administration, as it has a large number of employees and can therefore more easily monitor each individual in the US.
[2][4][10] Broadly put, much of the social science literature on the topic assumes that the origins of fiscal capacity lie in the decisions, incentives and constraints of different, self-interested actors that compete against one another.
[9] North and Weingast (1989) for instance, stressed "the importance of the imposition of constitutional constraints after 1689 in reining in the power of the monarch as a precondition for the subsequent success of the English state and economy.
"[5][13] In a summary of literature regarding fiscal capacity, Johnson and Koyama (2015) further highlight an agreement among historians, that watershed moments in "the constitutional and fiscal history of England" as well as the "important role played by political elites and the formation of political parties" were essential to "granting the state previously undreamt of powers to raise taxes, spend and borrow" while preventing the crown from later exploiting the power to tax for itself.
Frequently it is the private-order institutions—such as family alliances, religious organizations, or informal trade networks—which from the bases around which public-order institutions [such as tax administrations, land registries or courts] are eventually built.
[5] Political historians, such as Samuel P. Huntington and Charles Tilly, postulate that war is the primary incentive for states to invest in fiscal capacity.
[3] Herbst first explains that war in Europe pressed governments "to find new and more regular sources of income" by improving fiscal capacity, incentivized citizens "to acquiesce to increased taxation...because a threat to their survival will overwhelm other concerns they might have about increased taxation", and led to nationalism allowing governments to exact power and collect taxes with greater ease; Herbst then demonstrates that in the absence of war, many African states have lacked these same incentives and have thus not been able to increase fiscal capacity.
[3] Nonetheless, studies have also found that despite evidence in Europe, the relationship between fiscal capacity and war does not hold true in South America and Africa.
[5][14][15] Development economists Besley and Persson and Gordon and Li explain that fiscal capacity have to do with "deep structural change" that will be "conducive to extracting taxation".
[11] A standard metric system, Scott explains, laid the groundwork for additional practices such as centralized administrations and the creation of tax codes.
This transformation, he explains, exemplifies state agents' incentives to make the general population "simplified and legible"; for instance, Russian state officials attempted to create a cadastral map, which, like a tax administration, consists of competent administrative agents creating a clear, simple and explicit register of property ownership.