American Political Science Review (2018)112.4.996-1015 doi:10.1017/S0003055418000333 American Political Science Association 2018 Endogenous Taxation in Ongoing Internal Conflict:The Case of Colombia RAFAEL CH New York University JACOB SHAPIRO Princeton University ABBEY STEELE University of Amsterdam JUAN F.VARGAS Universidad del Rosario ecent empirical evidence suggests an ambiguous relationship between internal conflicts,state ca- pacity,and tax performance.In theory,internal conflict should create strong incentives for gov- ernments to develop the fiscal capacity necessary to defeat rivals.We argue that one reason that this does not occur is because internal conflict enables groups with de facto power to capture local fiscal and property rights institutions.We test this mechanism in Colombia using data on tax performance and property rights institutions at the municipal level.Municipalities affected by internal conflict have tax institutions consistent with the preferences of the parties dominating local violence.Those suffering more right-wing violence feature more land formalization and higher property tax revenues.Municipalities with substantial lef-wing guerrilla violence collect less tax revenue and witness less land formalization.Our findings provide systematic evidence that internal armed conflict helps interest groups capture municipal institutions for their own private benefit,impeding state-building. 4号 INTRODUCTION gions outside of Europe (Centeno 2003;Vu 2010)and for more recent time periods(Scheve and Stasavage istorically,conflicts have motivated states to de- 2012).1 velop their fiscal capacity.According to Tilly Yet the effect of internal wars on state-building and 1992).the formation of nation-states in early modern Europe emerged in part by the fiscal demands fiscal capacity is more ambiguous.While an extension of Tilly's logic to internal wars implies that the state created by expansionary external wars.Those demands should try harder to state-build when challenged,that incentivized leaders to develop institutions that could monitor local populations and levy taxes.The result- clearly does not always happen.This raises an im- portant question:What prevents would-be contempo- ing tax revenue was used to finance armies that would rary state-builders from acting on these incentives?Of protect their kingdoms from external threats or ex- course,when two parties are seeking to build compet- 是 pand their territories.Subsequent work provides em- ing tax institutions within the same territory (e.g.,state pirical support for this theory at the cross-country and rebels),then the net effect is ambiguous.Centeno level(Besley and Persson 2008)and refines it for re- (2003)also argues that the prevalence of civil wars rather than mass wars in Latin America accounts for 2135.501g90 Rafael Ch is a Graduate Student,New York University,Wilf Family the weaker states in the region because they fostered Department of Politics,19 West 4th St.,Room 230,New York,NY elite divisions,physical destruction,and military rather 10009 (rafael.ch@nyu.edu). than mass mobilization. Jacob Shapiro is a Professor of Politics and International Affairs, Princeton University,Woodrow Wilson School of Public and Inter- Empirically,Besley and Persson(2008)and Carde- national Affairs,Princeton,NJ 08544 (jns@princeton.edu). nas,Eslava,and Ramirez(2014)provide evidence that Abbey Steele is an Assistant Professor,University of Amsterdam. internal conflict negatively affects various measures Department of Political Science.Nieuwe Achtergracht 166,1018 WV of state capacity.In Southeast Asia,however,Slater Amsterdam(REC B building)(A.A.Steele@uva.nl). Juan F.Vargas is a Professor of Economics,Universidad del (2010)finds that communal urban unrest and endemic Rosario,School of Economics,Calle 12C No 4-69,Of.315,Bogota violence are both likely to lead elites to tax themselves (juan.vargas@urosario.edu.co). And in Latin America.Soifer (2015)finds evidence We benefited tremendously from excellent comments by Fer- that the prevalence of conflict was crucial for extending nando Alvarez,Mario Chacon,Ursula Daxecker,Leopoldo Fergus- the state during the nineteenth century,and Rodriguez- son,Patrick Kuhn,Livia Schubiger,Pablo Sanguinetti,and seminar Franco (2016)finds that Colombia's elites in Bogota participants at CAF's RED 2015 Workshop in Buenos Aires,the 2015 Empirical Studies of Conflict(ESOC)Annual Meeting,the Up. began to support state-building through new taxes psala University Research Seminar,the conflict seminar at Konstanz in the early 2000s after several decades of internal University,the Amsterdam Conflict Club,and the 2017 Subnational conflict. State in Latin America Conference at the University of Amster- The literature has so far focused on national-level fis- dam.We acknowledge generous funding from CAF-Development Bank of Latin America.ONR through Grant No.N000141310097 cal capacity,but contemporary states feature multiple and AFOSR through Grant No.FA9550-09-1-0314.Dario Sal- administrative layers,and a critical ingredient for the cedo provided superb research assistance.Replication material is consolidation of the state is the introduction of sound available on the American Political Science Review Dataverse: https://doi.org/10.7910/DVN/PCM202. Despite broad support for the theory,some have challenged its Received:August 4,2017;revised:February 1,2018;accepted:May validity for early modern Europe (e.g.,Spruyt 1996;Ertman 1997; 30,2018.First published online:August 3,2018. Gorski 1993). 996
American Political Science Review (2018) 112, 4, 996–1015 doi:10.1017/S0003055418000333 © American Political Science Association 2018 Endogenous Taxation in Ongoing Internal Conflict: The Case of Colombia RAFAEL CH New York University JACOB SHAPIRO Princeton University ABBEY STEELE University of Amsterdam JUAN F. VARGAS Universidad del Rosario Recent empirical evidence suggests an ambiguous relationship between internal conflicts, state capacity, and tax performance. In theory, internal conflict should create strong incentives for governments to develop the fiscal capacity necessary to defeat rivals. We argue that one reason that this does not occur is because internal conflict enables groups with de facto power to capture local fiscal and property rights institutions. We test this mechanism in Colombia using data on tax performance and property rights institutions at the municipal level. Municipalities affected by internal conflict have tax institutions consistent with the preferences of the parties dominating local violence. Those suffering more right-wing violence feature more land formalization and higher property tax revenues.Municipalities with substantial left-wing guerrilla violence collect less tax revenue and witness less land formalization. Our findings provide systematic evidence that internal armed conflict helps interest groups capture municipal institutions for their own private benefit, impeding state-building. INTRODUCTION Historically, conflicts have motivated states to develop their fiscal capacity. According to Tilly (1992), the formation of nation-states in early modern Europe emerged in part by the fiscal demands created by expansionary external wars. Those demands incentivized leaders to develop institutions that could monitor local populations and levy taxes. The resulting tax revenue was used to finance armies that would protect their kingdoms from external threats or expand their territories. Subsequent work provides empirical support for this theory at the cross-country level (Besley and Persson 2008) and refines it for reRafael Ch is a Graduate Student, New York University, Wilf Family Department of Politics, 19 West 4th St., Room 230, New York, NY 10009 (rafael.ch@nyu.edu). Jacob Shapiro is a Professor of Politics and International Affairs, Princeton University, Woodrow Wilson School of Public and International Affairs, Princeton, NJ 08544 (jns@princeton.edu). Abbey Steele is an Assistant Professor, University of Amsterdam, Department of Political Science. Nieuwe Achtergracht 166, 1018 WV Amsterdam (REC B building) (A.A.Steele@uva.nl). Juan F. Vargas is a Professor of Economics, Universidad del Rosario, School of Economics, Calle 12C No 4 - 69, Of. 315, Bogotá (juan.vargas@urosario.edu.co). We benefited tremendously from excellent comments by Fernando Álvarez, Mario Chacón, Ursula Daxecker, Leopoldo Fergusson, Patrick Kuhn, Livia Schubiger, Pablo Sanguinetti, and seminar participants at CAF’s RED 2015 Workshop in Buenos Aires, the 2015 Empirical Studies of Conflict (ESOC) Annual Meeting, the Uppsala University Research Seminar, the conflict seminar at Konstanz University, the Amsterdam Conflict Club, and the 2017 Subnational State in Latin America Conference at the University of Amsterdam. We acknowledge generous funding from CAF-Development Bank of Latin America, ONR through Grant No. N000141310097, and AFOSR through Grant No. FA9550-09-1-0314. Dario Salcedo provided superb research assistance. Replication material is available on the American Political Science Review Dataverse: https://doi.org/10.7910/DVN/PCM2O2. Received: August 4, 2017; revised: February 1, 2018; accepted: May 30, 2018. First published online: August 3, 2018. gions outside of Europe (Centeno 2003; Vu 2010) and for more recent time periods (Scheve and Stasavage 2012).1 Yet the effect of internal wars on state-building and fiscal capacity is more ambiguous. While an extension of Tilly’s logic to internal wars implies that the state should try harder to state-build when challenged, that clearly does not always happen. This raises an important question: What prevents would-be contemporary state-builders from acting on these incentives? Of course, when two parties are seeking to build competing tax institutions within the same territory (e.g., state and rebels), then the net effect is ambiguous. Centeno (2003) also argues that the prevalence of civil wars rather than mass wars in Latin America accounts for the weaker states in the region because they fostered elite divisions, physical destruction, and military rather than mass mobilization. Empirically, Besley and Persson (2008) and Cárdenas, Eslava, and Ramírez (2014) provide evidence that internal conflict negatively affects various measures of state capacity. In Southeast Asia, however, Slater (2010) finds that communal urban unrest and endemic violence are both likely to lead elites to tax themselves. And in Latin America, Soifer (2015) finds evidence that the prevalence of conflict was crucial for extending the state during the nineteenth century, and RodríguezFranco (2016) finds that Colombia’s elites in Bogotá began to support state-building through new taxes in the early 2000s after several decades of internal conflict. The literature has so far focused on national-level fiscal capacity, but contemporary states feature multiple administrative layers, and a critical ingredient for the consolidation of the state is the introduction of sound 1 Despite broad support for the theory, some have challenged its validity for early modern Europe (e.g., Spruyt 1996; Ertman 1997; Gorski 1993). 996 Downloaded from https://www.cambridge.org/core. Shanghai JiaoTong University, on 26 Oct 2018 at 03:53:05, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/S0003055418000333
Endogenous Taxation in Ongoing Internal Conflict and efficient tax systems at the local level.Moreover. the share of tax revenues generated locally (de Mello security provision,property rights protections,and a Jr.2000).3 It also ranks in the middle of large devel- variety of development projects at the local level could, oping countries in terms of local revenue mobilization, in theory,facilitate state-building by shaping citizens above Indonesia at 38%but below India at approxi- preferences and behaviors in ways that favor the state mately 62%(Bird 2012).Third,local government au- over its competitors. thorities have substantial freedom to shape property Several potential mechanisms have been proposed and tax institutions.They can choose tax rates,order to explain the relationship between internal conflict or impede updates on the land value,select revenue and state capacity that are relevant for thinking about collection methods,and alter penalties and incentives. the relationship between conflict and tax performance In theory,this autonomy could facilitate efficient local at the local level.To mention a few:(1)By destroying tax administration by allowing the system to be tailored physical capital,inducing forced migration,and reduc- to the needs of each municipality.In practice,in the ing the market value of private property in affected ar- context of uneven state presence and varying degrees eas,conflict deteriorates the tax base.(2)Conflict gen of contestation by illegal armed groups,local institu- erates negative reciprocity of tax payers toward a state tions can be captured by private groups with vested that they judge to have failed to protect them(Car- interests.4 denas,Eslava,and Ramirez 2014).(3)A conflict envi- Fourth,and most importantly,the main combatants ronment reduces the return of productive activities and had clear preferences regarding state-backed property raise that of illegal businesses,which do not pay taxes to rights throughout much of the war.which had impli- the state(Besley and Persson 2008).(4)Armed groups cations for the local tax base and performance.Right- create their own governance systems that divert civil- wing paramilitaries favored land owners and promoted ians'resources away from the state and crowd out state the accumulation of large estates,which served as institutions (Mampilly 2011;Arjona 2016;Sanchez de means to launder illegally acquired capital (through la Sierra 2017).(5)Conflict facilitates the emergence the drug trade,for example)or realize economies of 4r元 of interest groups with de facto power(for instance be- scale in agricultural production and cattle ranching cause of their access to weapons)that can capture local (Reyes Posada 2007 [1991]).5 On the left-wing side, political and economic institutions(Eaton 2006;Lopez both FARC and ELN guerrilla groups aimed to re- 2010;Mampilly 2011).Such capture prevents state in- place what they characterized as an unjust state and stitutions from eliminating competitors,and from cre- claimed to be acting on behalf of peasants and work- ating a durable and credible relationship with citizens ers.The guerrillas backed land invasions of state and in these regions. private property in many areas (e.g.,Steele 2017).The We focus on the latter political economy mechanism. FARC also viewed state-recognized private property In the context of internal conflicts,local tax institu- as illegitimate or unnecessary:in its VIII Conference tions (both formal and informal)are shaped by differ- in 1993,it still backed collectivized property (Bernal ent types of vested interests.We explore the extent to Morales 2014).(During peace talks with the Santos which armed groups shape existing property and tax administration in 2012,the FARC supported land for- institutions differently depending on their preferences. malization for the first time.)In areas that they influ- To the best of our knowledge,this mechanism has not enced,the guerrillas regulated property in parallel to been studied in the previous literature,either theoret- the state.For instance,they claimed the right to re- ically or empirically.2 Our argument is that local tax distribute unused land or land from narcotraffickers and property rights institutions are shaped by illegal 8 (Bernal Morales 2014).5 armed actors who influence state institutions to further These positions on property rights stem from their interests and those of the civilian groups they fa- ideological commitments and make sense from the vor.Specifically,we expect that right-wing paramilitary perspective of combatants trying to maximize their groups will favor establishing formal property rights control over territory,and to mobilize supporters.His- for land owners,while left-wing insurgents will do the torically,land titling and formalization has favored opposite. We test this argument in Colombia,which has four traits that make it an ideal setting for studying the re- The share of tax revenue collected locally is the standard measure lationship between civil conflict,institutional capture of revenue decentralization in the literature,but is only available for limited subset of countries. and local tax performance.First,the dynamics of the 4 This insight follows naturally from the theory in Persson and eys internal conflict vary substantially across the country's Tabellini(2002),among others,in which heterogeneous agents take 1,122 municipalities.Moreover,within each municipal- advantage of the discretion granted them. ity,violence also varies across different periods of the Paramilitaries displaced people to take their land and titling in ar- war.Second,Colombia sits roughly in the middle of eas with paramilitary presence was not always aboveboard.For ex- the distribution of non-OECD countries in terms of ample.public notaries,the officials charged with validating the prove- nance of land,were infiltrated by paramilitaries (e.g.,Duran 2012: Verdad Abierta 2012). 6 Internal divisions with the FARC existed,but it was a centralized 2 See Eaton(2006)and Lopez(2010)on other forms of capture by organization that adopted policies in its conferences that were rel- illegal armed groups in Colombia.Mampilly (2011)analyzes rebel atively well enforced throughout.The paramilitaries were more de- 士 governance more broadly and Arjona(2014)finds that armed groups centralized but none challenged the basic legitimacy of state institu operated alongside state institutions in roughly one-quarter of the tions (even if they argued that they could be run more effectively) Colombian communities in her sample. (Gutierrez Sanin 2008;Romero 2003). 997
Endogenous Taxation in Ongoing Internal Conflict and efficient tax systems at the local level. Moreover, security provision, property rights protections, and a variety of development projects at the local level could, in theory, facilitate state-building by shaping citizens’ preferences and behaviors in ways that favor the state over its competitors. Several potential mechanisms have been proposed to explain the relationship between internal conflict and state capacity that are relevant for thinking about the relationship between conflict and tax performance at the local level. To mention a few: (1) By destroying physical capital, inducing forced migration, and reducing the market value of private property in affected areas, conflict deteriorates the tax base. (2) Conflict generates negative reciprocity of tax payers toward a state that they judge to have failed to protect them (Cárdenas, Eslava, and Ramírez 2014). (3) A conflict environment reduces the return of productive activities and raise that of illegal businesses,which do not pay taxes to the state (Besley and Persson 2008). (4) Armed groups create their own governance systems that divert civilians’ resources away from the state and crowd out state institutions (Mampilly 2011; Arjona 2016; Sánchez de la Sierra 2017). (5) Conflict facilitates the emergence of interest groups with de facto power (for instance because of their access to weapons) that can capture local political and economic institutions (Eaton 2006; López 2010; Mampilly 2011). Such capture prevents state institutions from eliminating competitors, and from creating a durable and credible relationship with citizens in these regions. We focus on the latter political economy mechanism. In the context of internal conflicts, local tax institutions (both formal and informal) are shaped by different types of vested interests. We explore the extent to which armed groups shape existing property and tax institutions differently depending on their preferences. To the best of our knowledge, this mechanism has not been studied in the previous literature, either theoretically or empirically.2 Our argument is that local tax and property rights institutions are shaped by illegal armed actors who influence state institutions to further their interests and those of the civilian groups they favor. Specifically, we expect that right-wing paramilitary groups will favor establishing formal property rights for land owners, while left-wing insurgents will do the opposite. We test this argument in Colombia, which has four traits that make it an ideal setting for studying the relationship between civil conflict, institutional capture, and local tax performance. First, the dynamics of the internal conflict vary substantially across the country’s 1,122 municipalities. Moreover, within each municipality, violence also varies across different periods of the war. Second, Colombia sits roughly in the middle of the distribution of non-OECD countries in terms of 2 See Eaton (2006) and López (2010) on other forms of capture by illegal armed groups in Colombia. Mampilly (2011) analyzes rebel governance more broadly and Arjona (2014) finds that armed groups operated alongside state institutions in roughly one-quarter of the Colombian communities in her sample. the share of tax revenues generated locally (de Mello Jr. 2000).3 It also ranks in the middle of large developing countries in terms of local revenue mobilization, above Indonesia at 38% but below India at approximately 62% (Bird 2012). Third, local government authorities have substantial freedom to shape property and tax institutions. They can choose tax rates, order or impede updates on the land value, select revenue collection methods, and alter penalties and incentives. In theory, this autonomy could facilitate efficient local tax administration by allowing the system to be tailored to the needs of each municipality. In practice, in the context of uneven state presence and varying degrees of contestation by illegal armed groups, local institutions can be captured by private groups with vested interests.4 Fourth, and most importantly, the main combatants had clear preferences regarding state-backed property rights throughout much of the war, which had implications for the local tax base and performance. Rightwing paramilitaries favored land owners and promoted the accumulation of large estates, which served as means to launder illegally acquired capital (through the drug trade, for example) or realize economies of scale in agricultural production and cattle ranching (Reyes Posada 2007 [1991]).5 On the left-wing side, both FARC and ELN guerrilla groups aimed to replace what they characterized as an unjust state and claimed to be acting on behalf of peasants and workers. The guerrillas backed land invasions of state and private property in many areas (e.g., Steele 2017). The FARC also viewed state-recognized private property as illegitimate or unnecessary: in its VIII Conference in 1993, it still backed collectivized property (Bernal Morales 2014). (During peace talks with the Santos administration in 2012, the FARC supported land formalization for the first time.) In areas that they influenced, the guerrillas regulated property in parallel to the state. For instance, they claimed the right to redistribute unused land or land from narcotraffickers (Bernal Morales 2014).6 These positions on property rights stem from ideological commitments and make sense from the perspective of combatants trying to maximize their control over territory, and to mobilize supporters. Historically, land titling and formalization has favored 3 The share of tax revenue collected locally is the standard measure of revenue decentralization in the literature, but is only available for a limited subset of countries. 4 This insight follows naturally from the theory in Persson and Tabellini (2002), among others, in which heterogeneous agents take advantage of the discretion granted them. 5 Paramilitaries displaced people to take their land and titling in areas with paramilitary presence was not always aboveboard. For example, public notaries, the officials charged with validating the provenance of land, were infiltrated by paramilitaries (e.g., Durán 2012; Verdad Abierta 2012). 6 Internal divisions with the FARC existed, but it was a centralized organization that adopted policies in its conferences that were relatively well enforced throughout. The paramilitaries were more decentralized but none challenged the basic legitimacy of state institutions (even if they argued that they could be run more effectively) (Gutiérrez Sanín 2008; Romero 2003). 997 Downloaded from https://www.cambridge.org/core. Shanghai JiaoTong University, on 26 Oct 2018 at 03:53:05, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/S0003055418000333
Rafael Ch et al. the wealthy and powerful in Colombia(Albertus and due to violence hurting the economy and by exten- Kaplan 2013;Flores 2014),and the FARC issued its sion,property value.The last of these is unlikely be- own tax rules.By obstructing the formal property rights cause it implies symmetric effects of violence by the regime,the FARC could meet its ideological commit- two parties on revenue,which we do not see.Turn- ments,impede the state in territory where it had influ- ing to (1)and(2),though we cannot directly measure ence,and avoid double taxing residents.Paramilitaries, intimidation and pressure,we can measure electoral on the other hand,were supported by groups such as outcomes.Municipalities with more paramilitary vio- large land owners who benefit from formal titles,in- lence do have a greater probability of electing can- cluding to secure land acquired through violence and didates from former President Uribe's right-wing po- coercion.The fact that formal titles create an obliga- litical party coalition,while the probability decreases tion to pay local property taxes would be a relatively in municipalities with high guerrilla violence.Causal small price to pay to secure new property. mediation analysis,however,shows that little of the In Colombia,we can make these expectations con- relationship between violence and tax revenue works crete and test them using disaggregated information on through electoral outcomes:the causal mediation ef- local institutions.We constructed a novel municipal- fect is small,statistically insignificant,and close to zero. level dataset that includes information on various di- This leads us to believe that more indirect mechanisms mensions of property and tax institutions,including the of capture,such as threats and violence against may- land value recorded in the cadaster(i.e.,property reg- ors and city council representatives,account for the dif- istry),the number of cadastral updates,and the dura- ferences in tax revenue and land formalization across tion between updates.s Municipal taxes are primarily municipalities. levied on property value,which is recorded and up- Overall then,guerrilla and paramilitaries'asymmet- dated in the cadaster.Cadaster updates are supposed ric influence on tax performance and land formality are to occur every five years,but municipal administrations consistent with armed group capture at the local level. are responsible for initiating and paying for the up- The higher the level of violence by an armed group,the 4号元 date,and a high proportion do not meet this legal obli- more tax institutions'outcomes shift in the direction of gation (Departamento Nacional de Planeacion 2016). that group's preferences. These data allow us to observe property and tax in This paper contributes to our understanding of con- stitutions at a high resolution.We combine these data temporary state-building during internal wars in four with administrative information on municipal prop- ways.First,our findings show that armed groups have erty tax revenues as well as with variables that ac- the ability to capture the state's local institutions to count for the longitudinal dynamics of conflict activity shape policy outcomes in their favor,which can block in Colombia the state from developing effective institutions.Though We find that armed groups'violent activity correlates Centeno (2003)argues that a minimal administrative with differences in property formalization and taxation state is a necessary condition to generate state-building that are consistent with the groups'political positions in Tilly's framework.we show that capture is an over- Municipalities with significant insurgent violence re looked concern even when this condition is met.Sec- port less land formalization and lower tax receipts.Mu- ond,we offer evidence that armed groups'preferences nicipalities that experienced significant paramilitary vi- and civilian "constituencies"are relevant for how they S5.501g olence have more land formalization and higher tax behave (Wood 2003:Gutierrez Sanin 2003).Third.the receipts.Revenue changes are mirrored by changes in variation in how armed groups reshape local tax insti- socio-economic outcomes,including development lev- tutions in their favor implies a need for a disaggregated els(measured with nighttime light intensity)as well as approach to post-conflict reconstruction.In Colombia secondary school enrollment,which are higher in ar- for example,the state should focus on land redistribu- eas with more paramilitary violence and lower in areas tion and progressive taxation measures in areas where with more guerrilla violence(see Appendix G in the the paramilitaries were dominant.In areas where in- Online Appendix). surgents were dominant,attention to land formaliza There are three obvious mechanisms that could drive tion and tax collection should be prioritized.Finally, the relationship between violence and revenue:(1)in- there is a broader policy lesson in these results.While direct capture through intimidation and pressure on fiscal decentralization might maximize political econ- political actors to update the cadaster or not,(2)di- omy goals in stable countries,it may also engender sig- rect capture of institutions through elections of favored nificant drawbacks in those experiencing ongoing vio- candidates who then carry out the policy preferred by lence(Steele and Schubiger,forthcoming;Eaton 2006) the armed group,and (3)reductions in tax revenues To restore the state's control over local tax institutions and property rights,the central state may have to limit 7 Early paramilitary supporters included drug traffickers who pur- municipal autonomy. chased vast tracts of land(Romero 2000:Ronderos 2014) The rest of the paper is organized as follows:The 8 The cadaster and the property title registry(Registro de Instrumen- next section provides some context and discusses the L tos Publicos)form the basis for property rights.The cadaster records theoretical framework of our argument.This is fol- the physical characteristics of land plots and properties,such as the lowed by the introduction of the data sources and our size and value.The Registro records the title holder for the property. As part of the peace agreement with the FARC,a new integrated empirical strategy.The subsequent section presents the cadaster and Registro is planned to eliminate red tape and modernize main results and robustness checks,followed by the the cadaster.See Departamento Nacional de Planeacion(2016). conclusion to the paper. 998
Rafael Ch et al. the wealthy and powerful in Colombia (Albertus and Kaplan 2013; Flores 2014), and the FARC issued its own tax rules.By obstructing the formal property rights regime, the FARC could meet its ideological commitments, impede the state in territory where it had influence, and avoid double taxing residents. Paramilitaries, on the other hand, were supported by groups such as large land owners who benefit from formal titles, including to secure land acquired through violence and coercion.7 The fact that formal titles create an obligation to pay local property taxes would be a relatively small price to pay to secure new property. In Colombia, we can make these expectations concrete and test them using disaggregated information on local institutions. We constructed a novel municipallevel dataset that includes information on various dimensions of property and tax institutions, including the land value recorded in the cadaster (i.e., property registry), the number of cadastral updates, and the duration between updates.8 Municipal taxes are primarily levied on property value, which is recorded and updated in the cadaster. Cadaster updates are supposed to occur every five years, but municipal administrations are responsible for initiating and paying for the update, and a high proportion do not meet this legal obligation (Departamento Nacional de Planeación 2016). These data allow us to observe property and tax institutions at a high resolution. We combine these data with administrative information on municipal property tax revenues as well as with variables that account for the longitudinal dynamics of conflict activity in Colombia. We find that armed groups’ violent activity correlates with differences in property formalization and taxation that are consistent with the groups’ political positions. Municipalities with significant insurgent violence report less land formalization and lower tax receipts.Municipalities that experienced significant paramilitary violence have more land formalization and higher tax receipts. Revenue changes are mirrored by changes in socio-economic outcomes, including development levels (measured with nighttime light intensity) as well as secondary school enrollment, which are higher in areas with more paramilitary violence and lower in areas with more guerrilla violence (see Appendix G in the Online Appendix). There are three obvious mechanisms that could drive the relationship between violence and revenue: (1) indirect capture through intimidation and pressure on political actors to update the cadaster or not, (2) direct capture of institutions through elections of favored candidates who then carry out the policy preferred by the armed group, and (3) reductions in tax revenues 7 Early paramilitary supporters included drug traffickers who purchased vast tracts of land (Romero 2000; Ronderos 2014). 8 The cadaster and the property title registry (Registro de Instrumentos Públicos) form the basis for property rights. The cadaster records the physical characteristics of land plots and properties, such as the size and value. The Registro records the title holder for the property. As part of the peace agreement with the FARC, a new integrated cadaster and Registro is planned to eliminate red tape and modernize the cadaster. See Departamento Nacional de Planeación (2016). due to violence hurting the economy and by extension, property value. The last of these is unlikely because it implies symmetric effects of violence by the two parties on revenue, which we do not see. Turning to (1) and (2), though we cannot directly measure intimidation and pressure, we can measure electoral outcomes. Municipalities with more paramilitary violence do have a greater probability of electing candidates from former President Uribe’s right-wing political party coalition, while the probability decreases in municipalities with high guerrilla violence. Causal mediation analysis, however, shows that little of the relationship between violence and tax revenue works through electoral outcomes: the causal mediation effect is small, statistically insignificant, and close to zero. This leads us to believe that more indirect mechanisms of capture, such as threats and violence against mayors and city council representatives, account for the differences in tax revenue and land formalization across municipalities. Overall then, guerrilla and paramilitaries’ asymmetric influence on tax performance and land formality are consistent with armed group capture at the local level. The higher the level of violence by an armed group, the more tax institutions’ outcomes shift in the direction of that group’s preferences. This paper contributes to our understanding of contemporary state-building during internal wars in four ways. First, our findings show that armed groups have the ability to capture the state’s local institutions to shape policy outcomes in their favor, which can block the state from developing effective institutions.Though Centeno (2003) argues that a minimal administrative state is a necessary condition to generate state-building in Tilly’s framework, we show that capture is an overlooked concern even when this condition is met. Second, we offer evidence that armed groups’ preferences and civilian “constituencies” are relevant for how they behave (Wood 2003; Gutiérrez Sanín 2003). Third, the variation in how armed groups reshape local tax institutions in their favor implies a need for a disaggregated approach to post-conflict reconstruction. In Colombia, for example, the state should focus on land redistribution and progressive taxation measures in areas where the paramilitaries were dominant. In areas where insurgents were dominant, attention to land formalization and tax collection should be prioritized. Finally, there is a broader policy lesson in these results. While fiscal decentralization might maximize political economy goals in stable countries, it may also engender significant drawbacks in those experiencing ongoing violence (Steele and Schubiger,forthcoming; Eaton 2006). To restore the state’s control over local tax institutions and property rights, the central state may have to limit municipal autonomy. The rest of the paper is organized as follows: The next section provides some context and discusses the theoretical framework of our argument. This is followed by the introduction of the data sources and our empirical strategy. The subsequent section presents the main results and robustness checks, followed by the conclusion to the paper. 998 Downloaded from https://www.cambridge.org/core. Shanghai JiaoTong University, on 26 Oct 2018 at 03:53:05, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/S0003055418000333
Endogenous Taxation in Ongoing Internal Conflict FIGURE 1.Tax Revenue over Total Expenditure across Colombian Municipalities period2002-2012 .4 .6 8 Tax Revenue^/Total Expenditure Source:Elaborated using fiscal data from CEDE. ^Tax Revenue tributary income,that corresponds to income by concept of tax on property,industry and commerce,and gasoline 4号元 CONTEXT body)issues the municipality's tax statute,which in- cludes the tax rates,the type of properties for which Tax Institutions and Tax Performance in each rate applies,the collection methods,and the pay- Colombia ment incentives and fines.1 Property tax rates vary sub- Municipalities in Colombia vary widely in their tax stantially between rural and urban areas,and may or performance.Figure 1 plots the ratio of tax revenue may not vary by type of property or its specific use(e.g., private housing,production,or commercial purposes). to total expenditure (averaged for the period 2000- 2012)across the country's 1,122 municipalities.The av- In addition,systems can be mixed within municipalities, erage municipality levies taxes worth 12%of their ex- with some properties and businesses taxed according to penditure,with the balance supplied by transfers from one rule (e.g.,the value of the property recorded in the municipal cadaster),and others according to another the national government based on population size and (e.g.,the socio-economic conditions of the neighbor- poverty levels,as well as royalties from natural re- source extraction.The variation is enormous,with sev- hood where the properties are located).The majority of municipalities have mixed systems that combine var- eral municipalities unable to generate practically any ious schemes revenue and a few capable of financing up to 80%of Regardless of the tax rates and system,the cadaster their expenditures with local taxes. forms the basis of property taxes.2 The cadaster in- The variation is not simply a proxy for economic ac- tivity,as Figure 2 shows.Panel (a)plots the distribution cludes the property values and the physical traits of properties.Outdated cadasters reduce the amount of of different tax revenues per capita at the municipal level,averaged from 2000 to 2012.9 Panel(b)shows the revenue a municipality collects in property taxes,be- same results normalized using nighttime lights to proxy cause recorded property values are lower than the true values(Iregui,Melo,and Ramos 2004). for economic activity (Vernon,Storeygard,and Weil 2011).The first column presents logged tributary in- come while the second shows the distribution of logged property tax income,which comprises the bulk of local 1 Asstated above.the cadaster is supposed to be updated every five revenue.10 years,but mayors are responsible for initiating the process.Then the The large variation in tax receipts reflects the free- national geographic institute,Instituto Geografico Augustin Codazzi dom that local authorities have in designing tax insti- (IGAC),is supposed to carry out the actual update with municipal resources.Although the municipal council sets tax rates,they must tutions.While the municipal mayor(the highest local- fall within a range defined by the National Congress.The current level executive authority)is in charge of updating the range for property tax is 5-16 per thousand for all types of properties. land registry,the city council (the municipal legislative Nufez (2005)reviews Colombia's local tax system. 12 Some residents pay property taxes even in the absence of formal title because it is a way to demonstrate continual presence on a parcel 9 Tax revenues are in constant Colombian pesos from 2008. of land.According to Colombian law,investments in land that make 10 Both are logged given their highly skewed distributions with a it"socially productive"can be rewarded with formal property rights long right tail of municipalities with larger tributary and property for the land in question after five consecutive years of residence (Law tax income. 200of1936). 999
Endogenous Taxation in Ongoing Internal Conflict FIGURE 1. Tax Revenue over Total Expenditure across Colombian Municipalities 0 2 4 6 8 10 Density 0 .2 .4 .6 .8 Tax Revenue^ / Total Expenditure period 2002-2012 Source: Elaborated using fiscal data from CEDE. ^Tax Revenue = tributary income, that corresponds to income by concept of tax on property, industry and commerce, and gasoline. CONTEXT Tax Institutions and Tax Performance in Colombia Municipalities in Colombia vary widely in their tax performance. Figure 1 plots the ratio of tax revenue to total expenditure (averaged for the period 2000– 2012) across the country’s 1,122 municipalities. The average municipality levies taxes worth 12% of their expenditure, with the balance supplied by transfers from the national government based on population size and poverty levels, as well as royalties from natural resource extraction. The variation is enormous, with several municipalities unable to generate practically any revenue and a few capable of financing up to 80% of their expenditures with local taxes. The variation is not simply a proxy for economic activity, as Figure 2 shows. Panel (a) plots the distribution of different tax revenues per capita at the municipal level, averaged from 2000 to 2012.9 Panel (b) shows the same results normalized using nighttime lights to proxy for economic activity (Vernon, Storeygard, and Weil 2011). The first column presents logged tributary income while the second shows the distribution of logged property tax income, which comprises the bulk of local revenue.10 The large variation in tax receipts reflects the freedom that local authorities have in designing tax institutions. While the municipal mayor (the highest locallevel executive authority) is in charge of updating the land registry, the city council (the municipal legislative 9 Tax revenues are in constant Colombian pesos from 2008. 10 Both are logged given their highly skewed distributions, with a long right tail of municipalities with larger tributary and property tax income. body) issues the municipality’s tax statute, which includes the tax rates, the type of properties for which each rate applies, the collection methods, and the payment incentives and fines.11 Property tax rates vary substantially between rural and urban areas, and may or may not vary by type of property or its specific use (e.g., private housing, production, or commercial purposes). In addition, systems can be mixed within municipalities, with some properties and businesses taxed according to one rule (e.g., the value of the property recorded in the municipal cadaster), and others according to another (e.g., the socio-economic conditions of the neighborhood where the properties are located). The majority of municipalities have mixed systems that combine various schemes. Regardless of the tax rates and system, the cadaster forms the basis of property taxes.12 The cadaster includes the property values and the physical traits of properties. Outdated cadasters reduce the amount of revenue a municipality collects in property taxes, because recorded property values are lower than the true values (Iregui, Melo, and Ramos 2004). 11 As stated above, the cadaster is supposed to be updated every five years, but mayors are responsible for initiating the process. Then the national geographic institute, Instituto Geográfico Augustín Codazzi (IGAC), is supposed to carry out the actual update with municipal resources. Although the municipal council sets tax rates, they must fall within a range defined by the National Congress. The current range for property tax is 5–16 per thousand for all types of properties. Nuñez (2005) reviews Colombia’s local tax system. 12 Some residents pay property taxes even in the absence of formal title because it is a way to demonstrate continual presence on a parcel of land. According to Colombian law, investments in land that make it “socially productive” can be rewarded with formal property rights for the land in question after five consecutive years of residence (Law 200 of 1936). 999 Downloaded from https://www.cambridge.org/core. Shanghai JiaoTong University, on 26 Oct 2018 at 03:53:05, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/S0003055418000333
Rafael Ch et al. FIGURE 2.Tax Revenue across Colombian Municipalities by Type average 2000-2012 Tributary income a) Property tax income c4 10 6 10 log(tributary income per capita) log(property tax income per capita) b) 10 6 5 10 15 log(tributary income) log(property tax income) normalized by nighttime lights normalized by nighttime lights Source:Elaborated using fiscal data from CEDE and nighttime light from NOAA. Tributary income:income by concept of tax on property,industry and commerce.and gasoline. The Capture of Local Tax and Property ited monopoly over the use of force."The influence of Institutions armed groups over locally elected politicians could be substantial. In Latin America.only Brazil and Venezuela have In Colombia,insurgents and right-wing paramilitary 115.5010 more decentralized systems,and in the rest of the coun- groups differed in their approaches to capture the state tries in the region,provincial or national governments (Lopez Hernandez 2010;Eaton 2006;Romero 2007). are in charge of tax legislation.In Colombia,fiscal au- Paramilitary groups frequently colluded with state tonomy was pursued because policymakers thought forces,but were independent of them.They forged that,combined with other decentralization reforms,it could help end the war (Eaton 2006,534,541).The Be- extensive ties to regional-and national-level politi- cians(Gutierrez Sanin 2010,16).Indeed,paramilitaries tancur administration(1982-1986)approved the direct were embraced,and,in some cases,even founded by election of mayors that began in 1988,and the two sub- sequent administrations under Barco and Gaviria de- the country's regional political elites (Romero 2003; Ronderos 2014:Duncan 2006). volved fiscal authority and budgetary responsibility to municipalities for several public goods such as educa- In contrast,the FARC focused on local organiza- tion,health,and road upkeep. tion,particularly through the Juntas de Accion Com- munal (JAC),committees based in the rural hamlets Unfortunately,despite those changes(and partly as within municipalities.While the FARC also engaged a result of them),the civil war intensified and spread in the 1990s (Sanchez and del Mar Palau 2006:Steele with some municipal-and national-level officials,they and Schubiger,forthcoming;Steele 2017).Municipal- did so to a far lesser extent then the paramilitaries. As Gutierrez Sanin (2010,18-9)points out,insur- ities became attractive targets for armed groups be- gents were less reliable partners for politicians,be- cause of the transfers and royalties they received and cause they were anti-state.Consistent with their leftist because the state was insufficiently equipped to pro- vide security to them.Eaton (2006,537)writes,"...the state now funds its own destabilization because armed 13 For example,in 2010 only 10 of the 277 alcaldes and municipal groups on the left and right have been able to ap- council members under investigation for ties to illegal armed groups propriate decentralized public revenues and to use were linked to the FARC:similarly.only 4%of the congress was in- vestigated for ties to the FARC,compared to 35%to paramilitary these funds to further reduce the state's already lim- groups (Lopez Hernandez 2010,33). 1000
Rafael Ch et al. FIGURE 2. Tax Revenue across Colombian Municipalities by Type 0 .1 .2 .3 .4 Density 0 5 10 15 log(tributary income per capita) Tributary income 0 .1 .2 .3 .4 0 5 10 15 log(property tax income per capita) Property tax income 0 .1 .2 .3 .4 Density 0 5 10 15 log(tributary income) normalized by nighttime lights 0 .1 .2 .3 .4 0 5 10 15 log(property tax income) normalized by nighttime lights average 2000-2012 a) b) Source: Elaborated using fiscal data from CEDE and nighttime light from NOAA. Tributary income: income by concept of tax on property, industry and commerce, and gasoline. The Capture of Local Tax and Property Institutions In Latin America, only Brazil and Venezuela have more decentralized systems, and in the rest of the countries in the region, provincial or national governments are in charge of tax legislation. In Colombia, fiscal autonomy was pursued because policymakers thought that, combined with other decentralization reforms, it could help end the war (Eaton 2006, 534, 541). The Betancur administration (1982–1986) approved the direct election of mayors that began in 1988, and the two subsequent administrations under Barco and Gaviria devolved fiscal authority and budgetary responsibility to municipalities for several public goods such as education, health, and road upkeep. Unfortunately, despite those changes (and partly as a result of them), the civil war intensified and spread in the 1990s (Sánchez and del Mar Palau 2006; Steele and Schubiger, forthcoming; Steele 2017). Municipalities became attractive targets for armed groups because of the transfers and royalties they received and because the state was insufficiently equipped to provide security to them. Eaton (2006, 537) writes, “…the state now funds its own destabilization because armed groups on the left and right have been able to appropriate decentralized public revenues and to use these funds to further reduce the state’s already limited monopoly over the use of force.” The influence of armed groups over locally elected politicians could be substantial. In Colombia, insurgents and right-wing paramilitary groups differed in their approaches to capture the state (López Hernández 2010; Eaton 2006; Romero 2007). Paramilitary groups frequently colluded with state forces, but were independent of them. They forged extensive ties to regional- and national-level politicians (Gutiérrez Sanín 2010, 16). Indeed, paramilitaries were embraced, and, in some cases, even founded by the country’s regional political elites (Romero 2003; Ronderos 2014; Duncan 2006). In contrast, the FARC focused on local organization, particularly through the Juntas de Acción Communal (JAC), committees based in the rural hamlets within municipalities. While the FARC also engaged with some municipal- and national-level officials, they did so to a far lesser extent then the paramilitaries.13 As Gutiérrez Sanín (2010, 18–9) points out, insurgents were less reliable partners for politicians, because they were anti-state. Consistent with their leftist 13 For example, in 2010 only 10 of the 277 alcaldes and municipal council members under investigation for ties to illegal armed groups were linked to the FARC; similarly, only 4% of the congress was investigated for ties to the FARC, compared to 35% to paramilitary groups (López Hernández 2010, 33). 1000 Downloaded from https://www.cambridge.org/core. Shanghai JiaoTong University, on 26 Oct 2018 at 03:53:05, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/S0003055418000333