The importance of seignorage relative to other sources of government
revenue differs markedly across countries. The main theoretical implication
of this paper is that countries with more unstable and polarized political
systems rely more heavily on seignorage. This result is obtained within the
context of a political model of tax reform. The model implies that the more
unstable and polarized the political system, the more inefficient is the
equilibrium tax structure (in the sense that tax collection is more costly
to administer), and the higher therefore, the reliance on seignorage. This
prediction of the model is tested on cross-section data for 79 countries.
It is found that, after controlling for other variables, political instability
significantly contributes to explain the fraction of government revenue
derived from seignorage. This finding is very robust. We also find that
seignorage is positively related to political polarization, even though here
the evidence is weaker because of difficulties in measuring polarization.
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