Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/339248 
Year of Publication: 
2026
Series/Report no.: 
WIDER Working Paper No. 22/26
Publisher: 
The United Nations University World Institute for Development Economics Research (UNU-WIDER), Helsinki
Abstract: 
An influential literature suggests that the rise of taxation should come with a 'governance dividend': the quality of government should improve, because the taxpaying citizenry will subject the ruler to increased scrutiny. While this fits the history of nowadays advanced economies, it is less clear whether a governance dividend can materialize in less developed economies and, above all, which taxes are more likely to produce it. This paper contributes to address this lacuna by investigating whether factor income taxation may affect governance quality in low- and middle-income countries, using panel data for 102 countries from 1965 to 2018, new measures of effective tax rates on capital and labour, and four key governance dimensions: electoral democracy, vertical accountability, egalitarian democracy, and rule of law. Our baseline estimates suggest a generalized positive association between capital income taxation and governance. By contrast, the association between labour income taxation and governance appears concentrated on egalitarian democracy. To address endogeneity, we implement an instrumental variables strategy based on shift-share instruments. Instrumental variable (IV) estimates suggest that capital taxation has a positive causal effect on the rule of law, with no clear effect on other dimensions of governance. Instead, labour income taxation exerts a positive effect on egalitarian democracy. These findings are consistent with the view that the nature of the fiscal contract may be different for capital and labour owners, and they suggest that designing tax systems may also lead countries to different paths of political and institutional development, depending on which factor of production one chooses to tax.
Subjects: 
factor income taxation
governance dividend
institutions
economic development
JEL: 
P5
N4
D7
O2
P4
F6
Persistent Identifier of the first edition: 
ISBN: 
978-92-9267-698-8
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.