Title: Taxation and State Building Under Diversity
Description: The ethnic and religious diversity of the population is often associated with worse state building outcomes, including lower levels of taxation. In this dissertation I investigate how diversity hinders state building and how it shapes the patterns of taxation. The dissertation is structured around two main questions. The first question is: What are the mechanisms through which diversity constrains state building? Building on the fact that periods of state building include increases in the amount of taxes levied on the populations follows the second question that concerns the distributional consequences of the increases in the amount of taxes: Which groups bear the increasing fiscal burdens of an expanding state during periods of state building? I argue that diversity impedes state building by increasing the costs of the state’s investment in fiscal capacity. This is because in more diverse places the different ethnic and religious identities of the population make them more illegible to the state’s agents, making it more difficult for the state to acquire knowledge about the population and its economic activities.

This illegibility also increases the bargaining power of local intermediaries vis-à-vis the state, which makes investment in fiscal capacity even costlier as these groups often oppose state building. Because it is cheaper to invest in the fiscal capacity of less diverse places, I also argue that the tax burdens of the core/dominant groups in the society, even though they are in power, increase more than the tax burdens of the minorities during periods of state building. I test these arguments in the context of late-nineteenth and early-twentieth century Ottoman Empire. The main empirical evidence relies on statistical analyses of an original dataset based on my archival work in the Ottoman archives in Istanbul. In addition to this, I use other original and secondary datasets, as well as a close reading and qualitative analysis of correspondences among Ottoman bureaucrats in the Ottoman archives. Using the local-level fiscal revenue data, I demonstrate that the increases in fiscal revenues during wartime were lower in more diverse areas in the empire, indicating diversity hinders state building.

Using another dataset on the local-level expenses of the state, I find that the state had to invest more in more diverse provinces to be able to extract a unit revenue. This suggests that the costs of investment in fiscal capacity were higher under diversity. In order to provide evidence for the mechanisms I suggest in the argument, I show that the Ottoman State was less successful in successfully completing censuses in more diverse areas, which is consistent with the argument that diverse populations are more illegible to the state. I also utilize a dataset on governor assignments to provide evidence that diversity constrained possible government assignments, potentially decreasing bureaucratic capacity. I complement these quantitative analyses with qualitative analyses of archival documents and evidence from secondary sources. With these findings, I make three main contributions to the literatures on state building, the politics of taxation, and identity politics. First, I demonstrate that diversity impedes state building, and it does so by rendering populations illegible and making investment in fiscal capacity more costly.

Hence, I propose and test a new theory that explains why diversity constrains state building, by bringing together insights from the state building and identity politics literatures. Second, I show that because the members of the core/dominant groups are more legible to the state and investment in fiscal capacity is cheaper where they live, they undergo higher tax burdens of the state building processes compared to the minorities. This indicates a distributive outcome that goes contrary to conventional wisdom where the ruling identity group taxes itself rather than other groups. Finally, finding that war can result in stronger states only under sufficient homogeneity of the population, I underline ethnic and religious diversity as factors that might condition the relationship where war leads to stronger states. This offers one possible explanation why the argument in the wider literature that warfare leads to stronger states is often challenged outside Early Modern Europe, where the populations were less diverse.