Endogenous Taxation in Ongoing Internal Conflict: The Case of Colombia
by Rafael Ch, New York University, Jacob N. Shapiro, Princeton University, Abbey Steele, University of Amsterdam and Juan F. Vargas, Universidad El Rosario
How does internal armed conflict affect state development? In theory, civil wars should create strong incentives for governments to develop the fiscal capacity necessary to defeat rivals. But recent empirical evidence suggests an ambiguous relationship between internal conflicts, state capacity and tax performance. One reason could be that internal conflict enables groups with de facto local power to capture fiscal and property rights institutions. We find strong evidence for this mechanism in Colombia. Data on tax performance and property rights institutions at the municipal level show that municipalities affected by internal conflict have tax institutions consistent with the preferences of the parties dominating local violence. Where right-wing groups dominated there was more land formalization and higher property tax revenues. Where left-wing guerrilla violence dominated the state collected less tax revenue and there was less land formalization. Internal armed conflict can help interest groups capture municipal institutions for their own benefit, impeding state-building.