Domestic revenue displacement in resource-rich countries: What’s oil money got to do with it?

Abstract

Cross-country studies on the effect of hydrocarbon revenues and non-hydrocarbon tax effort are only now emerging. Using an expanded global dataset in a two-stage least squares framework, we confirm a displacement effect. A percentage point increase in hydrocarbon revenues displaces non-hydrocarbon revenues by 0.2 to 0.3 percentage points. With low levels of domestic revenue and a debt crises looming for many developing countries, resource-rich countries need to leverage on their resource wealth to invigorate the non-resource sectors of their economies. This should widen the tax base and optimize the tax take for oil-rich countries over the long haul.