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Public Choice
Published in: Public Choice 1-2/2023

19-12-2022

Serving two masters: the effect of state religion on fiscal capacity

Authors: Antonis Adam, Sofia Tsarsitalidou

Published in: Public Choice | Issue 1-2/2023

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Abstract

This paper examines the effect of having a state religion on fiscal capacity. Our analysis extends the legitimization argument, which postulates that a state religion legitimizes the revenue-raising motives of the state. We then argue that the effect reduces the incentive of the state to invest in fiscal capacity. First, we build a simple theoretical model to highlight our central idea and derive our testable hypothesis. The model shows that in the presence of a legitimization effect, countries with a state religion face weaker incentives to invest in fiscal capacity, as they can raise revenue by exploiting the legitimizing power of the church. Next, we test the hypothesis in a potential outcomes model, which models the selection on observables using both recent and historical data. We show, always following our theoretical model, that countries with a state religion have lower fiscal capacity.
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Appendix
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Footnotes
1
Having a state religion may mean a lot of things, one of which is the fact that the ruler reserves for himself a prominent role in the state religion or church (Vaubel, 2017). And even if it is not the ruler who dominates, state officials make important decisions regarding both the church and the state. A centralized decision-making process for state and church is the aspect of state religion in which the present paper is interested.
 
2
The conclusion is consistent with the literature’s standard view (Besley & Persson, 2011) that external conflicts have strong positive effects on fiscal capacity.
 
3
See for example Gill (1994, 2002), Barros and Garoupa (2002), Ekelund et al. (2008), Ferrero (2002).
 
4
Extending the time series results in a reduction of our country sample to only 44 owing to the unavailability of the fiscal capacity data.
 
5
Following Barrett et al. (2001), an established state religion exists when there are legal provisions, including statements about religion in a country’s constitution.
 
6
Our model then assumes that “No man can serve two masters…” (Matthew 6:24, King James Version 2006). Each individual has a discrete choice of whether to engage in secular or spiritual activities. However, when all individuals are aggregated, the economy has a secular/religious activity trade-off.
Alternatively, we could derive the same results had we assumed that we have homogeneous individuals who choose how much time to allocate to the two activities. With the latter interpretation, it is clear that time allocated to religious activities is untaxed, exactly as we assume in Eq. (1). Seror (2018) adopts a similar assumption by arguing that clerics have an incentive to prohibit private economic activities so as to exert their control over the popular masses and capture higher rents.
 
7
The caesaropapism and the theocratic regime cases highlighted above are two extreme examples of church–state unity. In practice, an intermediate level of church–state integration might also exist, i.e., one where the state internalizes the effects of its decisions on the utility of the church and, hence, adopts policies consistent with the preferences of his favorite cult (Vaubel, 2017).
 
8
Even though we understand that fiscal capacity investment is made before any other decision, giving the state a first-mover’s advantage complicates the analysis further and will give an additional reason for a higher \(t\) in the competitive case.
 
9
The data of Barrett et al. (2001) do not provide information about the date of a change, if any, in the state religion for our full set of countries.
 
10
We would like to thank an anonymous referee for pointing out this example.
 
11
We rely on Barro and McCleary (2003), which reports the shares of main and secondary religion adherents. Countries wherein the adherents of one religion tend to be more highly concentrated are more likely to have state religions.
 
12
As population increases, a state religion can survive more easily. However, after a threshold level of population is reached, further growth in population increases religion-adherence homogeneity, attracting more religious denominations and reducing the probability of having a state religion.
 
13
We expect decreases in religious participation as GDP increases (Iannaccone, 1998). On the other hand, richer nations may spend more money on religious activities, thus creating an ambiguous effect.
 
14
Communist countries are less likely to establish state religions (Anderson, 1994).
 
15
In Appendix 9, and as a further robustness measure, we estimate an IV model in the spirit of Lewbel (2012). The main advantage of this model is that it does not require the existence of an external instrument and derives the causal effect of state religion on fiscal capacity by exploiting the heteroskedasticity in the first-stage equation to generate mechanical instruments.
 
16
The 44 countries in the long dataset are a subset of the countries in the cross-section. In this group there are countries with different levels of economic development, from all geographical regions, and given the robustness tests of the cross-sectional model, we are confident that our results are not biased.
 
17
Under the conditional independence assumption (Angrist and Kuersteiner 2011).
 
18
The other assumption of the inverse probability weighting model is that there is common overlap between treated and untreated observations. To visually inspect whether the overlap assumption holds, in Appendix 4, we present the Epanechnikov kernel-smoothed densities of the estimated propensities between the two groups. There is considerable overlap between treated and control propensities, and the control observations cover the support for all treated observations, supporting the overlap assumption (Imbens & Wooldridge, 2009).
 
19
In Appendix 2, as a robustness test, we also estimate a simple ordinary least squares (OLS) regression model of fiscal capacity as in Besley and Persson (2011). The results on our main variable of interest are qualitatively the same as the results in Table 2.
 
20
When we consider total taxes as a share of GDP, we have two opposing forces: First we have lower investment in fiscal capacity, and thus lower government revenues. However, in the short run, the legitimization effect suggests that total revenues might increase. As the empirical model in the present section examines a long-run (cross-sectional) relationship, it is natural to find that the former effect prevails, i.e., a negative and significant effect. In Appendix 8, we examine the short-run effect of an introduction of state religion on total government revenues, and find that there is a short-run legitimization effect as well as a negative long-run effect.
 
21
As a further robustness measure, in Appendix 3 we present the results when we use alternative potential outcome models, i.e., a regression adjustment and a doubly robust model (Jordà & Taylor, 2016; Kuvshinov & Zimmermann, 2019). All three methods provide similar results.
 
22
The first-stage results are presented in Appendix 5.
 
23
The Herfindahl index is computed for the year 2000, the same year that we use for the state religion variable.
 
24
Even though it appears that secularization and state religion go hand in hand, there is no perfect correlation between the two. It could be said, however, that our variable of state religion is the same as religiosity. Even though these might be valid objections, our data reveal that this is not necessarily the case, as there are several examples where religiosity is high and there is no state religion, the most prominent of which are Turkey and Indonesia.
 
25
To our knowledge, the datasets have been used widely in the literature (e.g., Barro & McCleary, 2005; Fish, 2011; Freese, 2004; Norris & Inglehart, 2004) and have the highest country coverage compared to other similar sources.
 
26
With the exception of Indirect Taxes and the ratio of Income to Indirect taxes, where the ATET becomes statistically insignificant (but correctly signed), the remaining measures stay qualitatively similar. However, this drop in significance is due to the smaller sample, as the same picture emerges when we estimate the baseline model for the same observations as in column (5). In Appendix 8, we estimate the same model using as a measure of secular values the index’s individual components.
 
27
The baseline variable has a correlation above 95% with the state religion measure of column (4) and a correlation of approximately 63% with Fox’s (2019) official religion variable, i.e., the variable employed in column (6). This suggests that even though all three variables capture similar forces, there is some difference, at least in the two proxies employed.
 
28
As a further test of the theoretical model in Appendix 7, we examine the effect of a state religion on religious activity within the same inverse probability weighting framework. We find that, indeed, there is a positive effect of state religion on religious activity, which in terms of the theoretical model is consistent with a positive last term inside in (12).
 
29
The dynamic model by including fixed effects and lagged values of state capacity implicitly uses as moderators variables that are either fixed in time, e.g., language, culture, type of religion, or changing slowly in time, e.g., secularization.
 
30
In Appendix 6, we estimate the same model without using weights. Interestingly, all the results presented in the present section regarding the effect of state religion remain unchanged. This latter model is correctly specified under a strict independence assumption, which is stricter than the assumptions of the present model. Moreover, when we use one minus the share of trade taxes to total taxes as a measure of fiscal capacity, in the case of the disestablishment of a state religion, there is a statistically significant pretreatment effect. This cautions against the use of the unweighted model, as pre-trend dynamics might be driving the results.
 
31
Gill and Owen (2017) argue that by restricting trade for certain religious individuals in their territories, the government lost tariff revenue. Then, as seen in the seventeenth-century example, the Netherlands suggests religious deregulation by allowing more people to trade, which resulted in economic growth and more government revenue.
 
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Metadata
Title
Serving two masters: the effect of state religion on fiscal capacity
Authors
Antonis Adam
Sofia Tsarsitalidou
Publication date
19-12-2022
Publisher
Springer US
Published in
Public Choice / Issue 1-2/2023
Print ISSN: 0048-5829
Electronic ISSN: 1573-7101
DOI
https://doi.org/10.1007/s11127-022-01025-w

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