Working Paper: NBER ID: w22421
Authors: Niko Jaakkola; Daniel Spiro; Arthur A. Van Benthem
Abstract: Natural-resource taxation and investment exhibit cycles in a vast number of countries, driving political turmoil and power shifts. Using a rational-expectations model, we show cycles result from governments' inability to commit to future taxes and firms' inability to credibly exit a country indefinitely. A government sets a low initial tax inducing high investments, which in turn prompts it to increase taxes next period. This induces low investment thus low future taxes, and so on. We investigate which factors reinforce cycles and present ways of avoiding them, and document cycles across many countries including detailed case studies of two Latin-American countries.
Keywords: Natural Resource Taxation; Investment Cycles; Political Economy
JEL Codes: H25; Q35; Q38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government tax policies (H29) | firm investment decisions (G32) |
| low initial taxes (H29) | high investments (G31) |
| high investments (G31) | higher future taxes (H29) |
| higher future taxes (H29) | lower investments (G31) |
| political shifts (P39) | higher tax agendas (H29) |
| political power shifts (P26) | low investment periods (G31) |
| public sentiment (E66) | cyclical behavior (E32) |