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State revenues and democratic development : oil rents, taxation, and the need for consent Wong, Judith Anne

Abstract

Why do some of the world’s countries with the most abundant natural resources, in particular oil wealth, have some of the poorest records in democracy and human development? A prominent argument in the literature on this “resource curse” is that resource rents supplant tax revenues as the fiscal foundation for the state. This rentier hypothesis suggests a relationship between rent revenues, a lack of taxation and lack of democracy, but this relationship is not clearly established or explained. In this paper I develop a model of the state in which tax revenues have a positive impact on democracy because states require widespread voluntary consent in order to effectively collect tax revenues, consent which can be achieved through democratization. I argue that rents negatively affect democracy because they substitute for tax revenues, and so eliminate the necessity of securing this consent. I use time series cross sectional quantitative analysis to examine broad patterns across states and time periods. I present evidence that a substitution effect exists, with oil rents correlated with lower tax revenues, particularly in authoritarian regimes. I examine evidence that rents require lower levels of consent than tax revenues, by testing two patterns in addition to democracy. Taxation is not only more positively correlated with democracy than are rents, but also more positively correlated with higher levels of government spending and coercion.

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