This paper examines the role of government capacity to collect taxes in driving economic development.

This paper examines the role of government capacity to collect taxes in driving economic development. We first draw on a new macro-historical database to document that tax collections relative to tax administration expenditures rise sharply with GDP per capita. We then interpret this finding in a neoclassical growth model with a tax administration sector in which labor inputs are required to raise tax revenues. Countries differ in their levels of tax productivity, capturing how effectively labor is used to raise taxes, as well as their levels of productivity in creating consumption and investment goods. Governments use tax revenues to provide public capital that complements private factors in production and to make transfers. Quantitatively, our model predicts that increases in tax productivity in low-income economies can raise GDP per capita substantially more than suggested by Hulten’s theorem. For outstanding research assistance, we thank Negin Jafari. For helpful comments we thank Marco Bassetto, Augustin Bergeron, Michael Best, Corina Boar, V.V. Chari, German Cubas, Xavier Gabaix, Emilien Gouin-Bonenfant, Roozbeh Hosseini, Jordan Norris, Steven Pennings, Valerie Ramey, James Robinson, Florian Scheuer, Gustavo Ventura, Joachim Voth, Tao Zha, and seminar/conference participants at Amherst College, ASU, the Atlanta Fed, Copenhagen, Houston, Nanyang Technological University, Nottingham, NYU, Cornell, the 2025 NBER Summer Institute Macro Public Finance, Tufts, USC, UC Irvine, the World Bank, the Tax and Development Conference at Williams College, the 2026 NBER Summer Institute Economic Growth and Long-Run Macroeconomic Development and the African Development Bank. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. In addition toworking papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals—theNBER Reporter, theNBER Digest, theBulletin on Health, theBulletin on the Economics of Alzheimer's, and theBulletin on Entrepreneurship—as well asresearch spotlights, lectures, and panel videos.