More oil, more or less taxes? New evidence on the impact of resource revenue on domestic tax revenue

The fiscal management of natural resource revenue is challenging particularly for developing countries. Despite providing a sizable amount of fiscal revenue, the volatility of natural resource revenue requires countries to rely on non-resource domestic revenue sources. In this paper, I revisit the question of how revenue from natural resources affects non-resource tax revenue and its components. I test the hypothesis that increased resource revenue is offset by a decrease in domestic non-resource tax revenue by exploiting an exogenous variation arising from giant oil and gas discoveries. I do not find evidence supporting the hypothesis of substitution between resource and non-resource revenues. Rather, I find that giant oil discoveries lead to temporarily higher tax collection that peaks when production starts. Interestingly, the increase in tax revenue occurs only in developing countries and is attributed to increased effort on taxes on income and international trade.