Hollowing Out the State: Franchise Expansion and Fiscal Capacity in Colonial India

Abstract

Studies of fiscal capacity have emphasized slow-moving structural and historical factors to explain variations in tax institutions. The cooperation of political elites, however, is crucial for building and maintaining robust tax institutions. This paper argues that political elites may weaken fiscal capacity in anticipation of new groups coming to power. One such instance occurred in the Colonial Indian provinces, where incumbent political elites hollowed out tax capacity in anticipation of franchise expansion. Why did this happen? In societies with hierarchical social orders, such as the caste system in India, incumbent elites are able to use the threat of de-segregation and a social-status cleavage to form anti-tax coalitions. Using a historical dataset from 1914-1925 and novel micro-level measures of land tax collection, tax avoidance, and the size of the bureaucracy, the paper demonstrates that fiscal capacity declined after franchise expansion in the districts with higher levels of inter-caste status inequality.

Keywords: Fiscal capacity, Democratization, Inequality, Ethnic politics