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Steal from the Poor,

Give to the Rich

Secrecy
Rivals cant credibly claim to offer more:

if

they dont know what members of the winning coalition are getting
if they dont know where the money is and how much there is
!

Keeps

supporters in the dark about what other


supporters are getting.
!

Members

of the WC have to negotiate deals not


knowing what it would cost to replace them.
!

Leaders

try to prevent coordination by members of


the WC in an effort to drive up their prices

Survival Rates by Regime Type

Surviving the 1st 6 Months


Plunder
Looting
Confiscations
Extraction
Fire

Sales

Reform
It

is easier for a public-goods providing democrat to survive


Can clamp down later once the funds are secured

Transparency

Democrats prefer transparency relative to


autocrats.
!

Helps

keep them in power

Taxpayers

must believe in justness of the system

!
!

(more on this in a minute)

3 Constraints on Taxation?

Constraints on Taxation
1. They diminish how hard people work
2. Some of the burden will fall on essentials
3. It is costly both in terms of expertise and
resources

Mmmmm . . . . . pie!

More Essentials (democracies):


Small

piece, Big Pie


Tax for things the market cant provide
Tax cuts cause the economy to grow, but it may not be enough growth
to generate:
increased private wealth
similar quantities of government revenue
!

Fewer Essentials (autocracies):


Big

Piece, Small Pie


Take as much as possible for cronies
Redistribute from outside the coalition (the poor) to inside the coalition
(the rich)
Makes being in even more valuable (loyalty)

Mexico: Democratization and Taxes

Not All Democracies Are Created Equal


Representation

districts.

usually (but not always!) involved

The

benets of many government projects are


concentrated in one (or a few) district (pork-barrel)
!

However,

districts.

the costs are distributed across all taxpayers/

Hence,
urban

these projects redistribute wealth geographically.

renewal projects,
sewage treatment plants,
land reclamation.

Winners and Losers


Who

benefits from pork barrel projects?

Consumers

of the project (in the district)


Companies providing materials for the project (in and outside the
district)
!

Who
All

bears the cost?

tax-payers.
Notice that if there are n districts of equal size, the district where
the project is located pays only 1/n of the cost.

The Electoral Logic


!

If

you care about the welfare of everyone, you


need to consider all the benefits and the costs.
!

If

you care about being reelected, you only need to


consider the benefits and the costs for your own
district.

Getting It Passed

How

do you get other representatives to vote for a


project that is only going to benefit your district?

Think like a logger!


!

Promise

other representatives that you will vote for


their projects log-rolling.
You

want to assemble a bare majority


It might require leaders to enforce the deal
Why parties matter!

Result:

As the number of districts increases, so


does economic inefficiency.

Confiscation

If the government makes you rich in an autocracy:


be

loyal!

If you became rich by some other means in an


autocracy:
prepare

to have your property seized and to do some jail time.

Democrats are much less inclined to seize


property
Violation

of property rights is really bad for commerce


Leads to a big decline in the size of the pie

Tax Collectors

Democracies
Cant

take too much as essentials are bearing some of the burden


Transparency
IRS governed by rules
Taxpayers have recourse to independent judiciary
To the extent the tax code is complex, it is because politicians
are trying to reward their supporters

Autocracies
Less

transparent
Higher rates lead citizens to hide their earnings (black markets)
If it costs $38 to collect taxes from an individual (flat rate), the
higher the GDP p/c, tax collection costs a lower amount of
overall revenues.

Quiz!

Whats

a monopsony?

Give

an example of a monopsony from todays


readings.

Government Monopsonies
Market Price

Gov't Price

80

60

40

20

0
1974

1984

1994

2004

2014

Government Monopsonies
Market Price

Gov't Price

80

60

40

20

0
1974

1984

1994

2004

2014

Government Monopsonies
Market Price

Gov't Price

80

60

40

20

0
1974

1984

1994

2004

2014

Private Tax Collectors


They have incentives to collect a lot

Paid

a percentage, the remainder goes to the leader

Pay

the leader a flat rate, get to keep the rest

Corruption
!

Let

essentials collect their own rewards

Reduces

resource and technical burden on the state

Financing the Tzars


Which

of these fluids has been responsible for


financing the Russian state since the mid-1500s?
1. Water
2. Vodka
3. Oil

Financing the Tzars


Which

of these fluids has been responsible for


financing the Russian state since the mid-1500s?
1. Water
2. Vodka
3. Oil

Financing the Tzars


Five

hundreds year ago there was no vodka


belt Tales of early Muscovite politics are steeped
in inebriety, but it wasnt vodka they were
drinking.
!

The

financial needs of the Russian state dictated


pushing the more profitable distilled vodka over
less lucrative beers and meads. To maximize
revenues, the state actively encouraged its
subjects to become alcoholics. (Schrad, ch. 7)

Let them drink vodka


Beginning

in the mid-1500s, vodka consumption


began to be actively promoted by the Russian state
!

During

the siege of Kazan (1552), Ivan the


Terrible discovered the kabaks, which were
government-run taverns
!

When

returning to Russia, Ivan ordered that all


privately-run taverns be replaced by kabaks

Let them drink vodka


The

government established a tax farming system


in which private individuals would compete for the
right to sell vodka over a certain area
!

The

system was consistent w/BdM & Smiths rules:

1. High profit margins meant tax farmers paid a lot


2. Pay your supporters: the nobility was in charge of the distilling
vodka and selling it to tavern owners
3. Squeeze the interchangeables: vodka was paid in cash, so
peasants literally left their shirts in the tavern
4. Plus, a drunken people is not conducive to revolution

A people and a state addicted to vodka

A people and a state addicted to vodka


Alcoholism

was bad for economic productivity,


and also for warfare
Crimea

(1853-56), Russo-Japanese War (1905)

But

remember rule #3: pay your supporters!

if the state promoted the health and well-bring of its citizens it


faced financial ruin yet the only alternative was to double
down and support the drunkenness and corruption of the tax
farm system. Time and again generations of Russian autocrats
chose the latter (Schrad, ch. 9)

The hangover
In

September 1914, Tzar Nicholas II foolishly declared


prohibition at the beginning of WWI
!

The

impossibility of paying the troops contributed greatly


to military defeat and the revolution
!

Initially,

the Bolsheviks retained prohibition (they had long


advocated against alcohol consumption)
!

But

the vodka monopoly was reintroduced in 1925 unlike


Nicholas, Stalin knew how to remain in power
!

By

the 1980s, alcoholism was again a serious economic issue

Extraction

Resource Rich Nations


Lower

economic growth
More prone to civil wars
More autocratic

Borrowing

Spend on cronies now, let someone else pay later


Money borrowed goes a long way with fewer
essentials.
Taxes to repay the debt will be spread over the entire
population
To be credible, a challenger must offer a way to repay
the debt
The availability of income from extractive resources
increases the amount lenders are willing to loan
Lenders only recourse is to not offer more credit in the
future
The need to borrow in the future means countries
typically repay.

Debt Forgiveness
Frees up the government to start borrowing again

Worst

in autocracies

Democracy reduces debt burden while debt


forgiveness (lack of financial crisis) deters
democratization
!

Failing to offer debt relief will actual increase


political liberalization, improve the quality of
governance, and improve the quality of life

Further Reading
Weingast, B., K. Shepsle, C. Johnsen. 1981. "The Political Economy
of Benefits and Costs: A Neoclassical Approach to Distributive
Politics. Journal of Political Economy 89: 642-664.
!

Schrad, Mark Lawrence. Vodka Politics: Alcohol, Autocracy, and the


Secret History of the Russian State. Oxford: Oxford University Press,
2014.