The rise of fiscal capacity

Abstract

Having sufficient fiscal capacity to tax is a key hallmark and defining feature of states, and there is a growing literature trying to explain its origins. Existing empirical evidence on fiscal capacity is scarce and focuses on large, ex-post successful territories. In this paper we study the introduction of the first centralized, permanent fiscal institutions in the multifarious territories of the Holy Roman Empire from 1400 to 1800. We link information on fiscal centralization and the size and survival of territories to an extensive dataset on state-formation and growthrelated outcomes. We empirically confirm that territories are more likely to centralize when neighboring territories are centralized and when they are exposed to a higher threat of war. In line with the literature on the consequences of fiscal capacity, we show that centralized territories are more likely to survive than non-centralized territories and as a result grow more in size. They invest more in administrative and military structures, but investments in the military only occur in the core areas of centralized territories. This contradicts the central assumption of models on fiscal capacity which states that investments into the military are a non-excludable public good.