Recently I have been reading ‘The Great Revenue Divergence’ by Alexander Lee and Jack Paine of the University of Rochester in New York State. The paper is really interesting for showing that in western Europe and east Asia, alongside their settler colonies, government revenue increased dramatically, whereas this did not occur anywhere else in the world. Whilst I was aware that government size increased dramatically after World War I, and that this had frequently been attributed to the demands of activist working classes in Europe, I was not aware that these increases in revenue were not remotely replicated outside Western Europe, Japan, and a small number of settler colonies.
Lee and Paine argue that Western Europe, Japan and settler colonies were able to increase revenue because efficient bureaucracies allowed them to gain sufficient information about their citizens to develop high-yielding income taxes between World War I and the end of the Bretton Woods system in 1971, without the exit of wealthy taxpayers, who were in these societies not “hidden citizens”. They do argue strongly that:
- increased demand from assertive working classes and from the costs of major military mobilisations for war was necessary for large fiscal extraction in the West and Japan
- between 1815 and 1914 when industrial workers almost invariably could not vote, the small electorate resisted taxation to an extreme degree
The dramatic effect of enfranchising
urban workers was previously noted by Jonathan A. Rodden in
‘The Long Shadow of the Industrial Revolution: Political Geography and the Representation of the Left’.
Urban workers and the
urban poor
demanded taxation to fund services they required but could not afford, whereas the middle and upper classes and the entire rural population resisted taxation vigorously,
Whilst their analysis of the period up to 1971 is very good, Lee and Paine overlook that following the end of Bretton Woods there appears to have been a “Second Great Revenue Divergence” although communication with Lee and Per Andersson (who created some of the sources for ‘The Great Revenue Divergence’) does not confirm this.
“The Second Great Revenue Divergence”?
Studying details of government revenue in the 2010s, what one notices is that the largest shares of government revenue relative to GDP are
not found in high-tax Western European nations. Rather, they are found in Persian Gulf petromonarchies, who impose no direct taxes whatsoever. As illustrated by Wilson Prichard, Paola Salardi and Paul Segal on page 300 of
‘Taxation, Non-Tax Revenue and Democracy’, these petromonarchies gain their wealth from rents selling oil and natural gas.
‘The Great Revenue Divergence’ notes the large non-tax revenue of these and other petrostates, but says absolutely nothing about when, how and why their non-tax revenues came to be so large. In communication with me, Alexander Lee says that the petrostates are entirely unrepresentative of former colonies, and that the trends in ‘The Great Revenue Divergence’ still hold. However,
Alexander Etkind and Emma Ashford (in her book
Oil, the State and War) argue that these non-tax revenues give petrostates unique leverage both geopolitically and economically. It is also highly plausible that the existence of fiscally successful states that impose zero taxes on extremely wealthy individuals — even considering the disadvantage of Islamic banking laws that forbid the rich gaining interest on accumulated wealth — permitted the tax revolts that halted the great increases in revenue in the West and Japan during the “long mid-century” between World War I and the 1973 oil crisis.
Botswana — although it possesses no oil or gas whatsoever — resembles oil-wealthy states in its high levels of non-tax revenue relative to GDP and population. This is because it
- possesses large deposits of “lootable” diamonds
- has the highest land:labour ratio of any country in the world, which permits rents for leasing land to graze cattle to be a valuable and significant source of revenue
Whilst I have not been able to confirm the reality or nonexistence of my putative “Second Great Revenue Divergence”, Michael Ross in his 2013 The Oil Curse: How Petroleum Wealth Shapes the Development of Nations does give evidence based upon data from low-income Nigeria that petrostate non-tax revenue did jump abruptly following the 1973 oil crisis. If the thesis of a “Second Great Revenue Divergence” is correct, one would expect that:
- non-tax revenue collected by wealthier petrostates (Ashford’s “Oil-Wealthy States”) increased much more during and after the 1973 oil crisis than beforehand
- total government revenue increases in oil-wealthy states since 1973 should be qualitatively larger than in the rest of the world
- as late as 1972 there would be no states collecting as a percentage of GDP the large non-tax revenues found in many petrostates today
The clearest evidence for a “Second Great Revenue Divergence”, and indeed the only data concerning pre-1970 revenue in any oil-wealthy state, is found in Rostam M. Kavoussi’s 1983
‘Economic Growth and Income Distribution in Saudi Arabia’, where it is shown that between 1965 and 1977 government revenue – almost entirely non-tax — increased from 37 percent to 69 percent of GDP, whilst total GDP increased by a factor of 4. Non-tax revenue in gold (as Lee and Paine measure it) thus must have increased by a factor of almost eight in twelve years. This fits in with the results of Ross noted above. If data for other oil-wealthy states existed, it is extremely likely similar trends would be discovered.
Contrariwise,
OECD government revenue has stagnated since the 1973 oil crisis. As noted above this is likely substantially caused by the appearance of fiscally successful states with perfect conditions for wealth accumulation. Competition with these severely limits the extent to which the wealthy can be taxed without becoming “hidden citizens” in tax havens with fiscal revenue far beyond past high-tax states, let alone previously existing tax havens. In countries with neither efficient bureaucracies to administer taxation nor access to large resource rents, the situation became far worse. Most of these nations were plunged into crises of debt, inflation and large-scale “structural adjustment” in the quarter-century after the oil crisis. Revenue has been restricted in the same way as in the OECD, and as we shall see their status as net debtors may of itself limit possibilities for revenue generation.
Why a Second Great Revenue Divergence?
How, as Kavoussi and Ross imply, did oil-wealthy states and Botswana become able to collect non-tax revenues beyond those of any pre-1973 state? Especially, why could other resource-rich states or colonies not collect these large non-tax revenues?
Ross and Jørgen Andersen in
‘The Big Oil Change: A Closer Look at the Haber–Menaldo Analysis’ show that a key factor behind the increased oil revenues was the wresting of oil revenues from the Western-based “Seven Sisters” resulting from anti-colonial movements in major oil producers. Colonial control is undoubtedly a decisive reason why even the most resource-rich colonies could not collect large non-tax revenues before 1973: allowing colonial governments to collect such revenues would have mortally weakened the resource-poor metropoles and limited the benefits provided by colonies. Another factor noted by Ross and Andersen is that oil and natural gas exceed in value all other minerals combined. Thus, exporters of other minerals lack and lacked access to the potential export revenues of petrostates. I suspect a third factor is that oil and natural gas require much less refining than “hard” minerals whose value is extremely low without expensive, capital- and energy-intensive concentration and smelting. Lootable diamonds are similar to oil in not needing refining to be extremely valuable, explaining why Botswana exhibits similar trends to oil-wealthy states.
Oil and gas are much higher yielding than non-tax revenue sources potentially available to earlier states. Pastoral and pilgrimage rents, which funded the Papal States and Lamaistic Tibet, cannot yield large revenues because of the low value of rented land and the limited income of most pilgrims, and also for another reason. In resource-rich nineteenth-century Latin America, as noted by Ryan Sailer and Nicholas Wheeler in
‘Paying for War and Building States: The Coalitional Politics of Debt Servicing and Tax Institutions’, governments were controlled by debtor landowners, who, they note, resisted tax reform. Debtor landowners would likely be much more resistant still to any reform aimed at increasing rents to a central government, as that would reduce their profits and ability to repay debt. Net creditors would be vastly more willing to pay rents, especially if this means they become freed from taxes. During the 1960s, declining US oil production combined with rapid increases in OECD demand allowed oil-based ruling classes to become large net creditors. To preserve their newly acquired credit, these ruling classes ceded prerogatives to the state, but as even Kevin Williamson in his far-right
The Politically Incorrect Guide to Socialism noted, this was actually a case of the oil industry seizing control of the government.
These data suggest three essential prerequisites for large government non-tax revenues:
- a large, valuable exportable natural resource requiring no extensive refining
- a state controlled by net creditors who cede prerogatives to that state
- when both prerequisites are met this is done in exchange for tax reduction and asset protection
- a state removed from control by foreign corporations, who will wish to restrict rent flows
- if this is not met, then the foreign corporations will seek to take potential state revenues for themselves as this gives them greater balance of power
Whilst this list may not be exhaustive or exact, it is suggestive given the dynamics in the lead-up to the Second Great Revenue Divergence. If correct, these requirements make the divergence self-perpetuating inasmuch as debtor states find it extremely difficult to raise taxes or rents, although petrostate rents are less reliable than direct taxes in the West and East Asia. It has made it impossible for even the most powerful states in the West to demand any sacrifices at all from the wealthiest petrostates, even when they are demonstrably the culprits behind climate change, international terrorism and wars.
