Universalization and the Origins of Fiscal Capacity

TL;DR

This paper introduces a model where moral internalization of tax compliance enhances fiscal capacity, showing how universalization reasoning can lead to credible reforms and escape low-capacity traps.

Contribution

It develops a novel theoretical framework linking moral internalization and universalization to fiscal capacity and reform credibility.

Findings

Moral internalization expands the tax base and promotes resource provision.

Universalization reasoning enables credible reform signaling.

States can escape low-capacity traps through moral channels even with weak institutions.

Abstract

This paper proposes a model of tax compliance and fiscal capacity grounded in universalization reasoning. Citizens partially internalize the consequences of concealment by imagining a world in which everyone acted similarly, linking their compliance decisions to the perceived effectiveness of public spending. A selfish elite chooses between public goods and private rents, taking compliance as given. In equilibrium, citizens' moral internalization expands the feasible tax base and induces elites to allocate resources toward provision rather than appropriation. When the value of public spending is uncertain, morality enables credible reform: high-value elites can signal their type through provision, prompting citizens to increase compliance and raising fiscal capacity within the same period. The analysis thus identifies a moral channel through which states may escape low-capacity traps even under weak institutions.