Endogenous Taxation in Ongoing Internal Conflict: The Case of Colombia

Recent empirical evidence at the cross-country and subnational levels suggests that internal conflicts harm state capacity and tax performance. On the face of it this is odd: internal conflict should create strong incentives for governments to develop the fiscal capacity necessary to assert full control over their territory, just as sociological theories argue external conflict did. We argue that one reason for the pattern is that internal conflict enables groups with de facto power to capture local political and economic institutions. We test this mechanism in the case of Colombia using data on tax performance and institutions in each of Colombia’s 1,120 municipalities. We show that municipalities most affected by internal conflict have tax institutions consistent with the preferences of the parties engaging in violence. Those suffering right-wing violence feature higher total property tax revenues and more land formalization. Municipalities with substantial left-wing guerrilla violence collected less tax revenue and saw less land formalization. These outcomes translate into differential level of social investment and social outcomes. Our findings provide the first concrete evidence that internal armed conflict helps interest groups capture municipal institutions for their own private benefit.