Oil revenues vs domestic taxation: Deeper insights into the crowding-out effect

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This paper exploits the 2000s commodity price boom to identify the impact of oil revenues on domestic taxation in oil exporting countries. It estimates the average effect of oil revenues on non-resource taxation for 19 oil exporting countries using synthetic control methodology and finds that non-resource tax per capita is on average 14% lower in oil exporting countries because of the 2000s commodity price boom compared to a scenario without price shock. This result confirms the existing literature concerned with the resource revenues vs domestic taxation debate. Additional knowledge is derived from the synthetic control method showing that the effect is heterogeneous and occurs only in oil exporting countries with a low level of institutional quality, which are highly oil dependent and prefer the use of tax instruments rather than non-tax instruments. Furthermore, the dynamics of the effect differs in countries with a state-owned oil sector compared to a private-owned oil sector. These findings are new within the debate and contribute to our understanding of the effect of natural resources on domestic taxation. Policy makers concerned by a crowding-out effect should invest the oil dividend to improve their tax administration to avoid the negative consequences accompanying low domestic taxes such as the resulting dependency on a volatile income stream from oil, difficulty in achieving non-fiscal objectives, and lack of positive externalities from taxes such as transparency and better governance.

Original languageEnglish
Article number102560
JournalResources Policy
Volume76
ISSN0301-4207
DOIs
Publication statusPublished - Jun 2022

Bibliographical note

Funding Information:
The author thanks the anonymous reviewers for their comments that helped improving the manuscript. Moreover, the author thanks Richard Tol, Sambit Bhattacharyya, Andrew Newell, Rick van der Ploeg, Eva-Maria Egger and the participants of the Sussex Economics PhD conference for many helpful comments.

Publisher Copyright:
© 2022 Elsevier Ltd

    Research areas

  • Natural resources, Oil boom, Oil revenues, Synthetic control methodology, Tax revenue

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