Tax Morale, Fiscal Capacity, and War

This paper studies how mobilization for war motivates citizens to contribute to their own community and therefore help forming tax morale in a constituency. We derive a theoretical model to investigate government's decision to expand tax revenues from alternative sources, namely changing the country's culture of tax compliance or expanding fiscal capacity. Despite the two are initially substitute, we show how in equilibrium dynamic complementarity arises. Our mechanism exploits exogenous variation in the cost of tax morale formation, induced by an expected war (either internal or external) that makes easier for the government to mobilize the constituency. We motivate our theory through a novel cross-country analysis that uses information on war frequency, tax morale, and fiscal capacity. We additionally discuss some historical cases consistent with our mechanism.