The great revenue gap between Western and non-Western states is a more recent phenomenon than previously believed, emerging in the first half of the 20th century. Two political scientists from the University of Rochester, Alexander Lee and Jack Paine, conducted a study in 2015 to investigate the impact of colonialism on the revenue collection abilities of newly independent states. Their research required data on both Western colonial powers and non-Western states, including former colonies. Lee and Paine collected extensive data from 18 Western countries and 76 non-Western countries, covering the 19th to the 21st century. Their findings were astonishing and challenged the conventional wisdom.
In 1913, Chile and Uruguay surpassed all Western European countries in revenue collection. Previous academic research on state revenues had overestimated the revenue collection abilities of Western European countries, particularly Britain, which was thought to have developed efficient revenue collection systems in the 1700s and 1800s. However, Lee and Paine discovered that the existing studies were based on incomplete and unrepresentative data. Their research revealed a previously overlooked pattern in state revenue collection. Contrary to assumptions, Western European countries did not significantly differ from the rest of the world in their per capita revenue collection until the eve of World War I. Despite having advanced infrastructure for revenue extraction, many European countries did not extensively utilize their taxation abilities.
In their paper titled “The Great Revenue Divergence,” published in the journal International Organization, Lee and Paine demonstrated that, in terms of per capita revenue collection, central governments in the West were on par with the rest of the world until the early 20th century. This was surprising considering the wealthier societies and longer history of fiscal innovation in the West. However, over the next 50 years, per capita revenue collection in Western countries witnessed a significant rise compared to other regions. The term “Western states” in their study referred to Western Europe, the United States, Canada, Australia, and New Zealand. The authors explained that the great revenue gap between the West and the rest of the world emerged in the first half of the 20th century and continued to widen.
Lee and Paine attribute the substantial differences in revenue collection to two factors: need and ability. They argue that high revenue intake requires a strong demand for governmental services from the population and a high level of bureaucratic capacity. Taxation and revenue extraction rely on robust institutions and the willingness of the population to pay taxes in exchange for increased state services. Historical circumstances such as war played a significant role in driving the need for increased revenue extraction. The First World War created an unprecedented demand for revenues to finance military expenditures. The higher level of revenue extraction in the West persisted after the war due to factors like war debts, expanded voting franchises, rising incomes, and the emergence of the modern welfare state.
It is important to note that higher revenue collection does not necessarily guarantee political stability. While tax collection and fiscal capacity are associated with economic development and political order, an exploitative government can misuse a capable tax system to exploit its population, potentially leading to internal conflicts and instability. However, in Western countries with checks and balances on the executive branch, an efficient tax system plays a positive role in maintaining political order.
In conclusion, the study conducted by Lee and Paine sheds light on the disparity in state revenue collection between the Western states and the rest of the world. The great revenue gap arose in the first half of the 20th century and has continued to widen. The research highlights the importance of understanding historical and societal factors that contribute to varying levels of revenue extraction and their implications for governance and political stability.
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