Oil Rents, Tax Revenues and the Shadow Economy: New Insights

In a nutshell

• It is often discussed that negative oil revenues may increase pressure for democratization via fiscal channels.
• A declining oil rents may increase the willingness of the state to collect more taxes, leading to more political economic participation of the people.
• We revise this argument in the resource curse literature by taking the shadow economy into account.
• Using a panel data covering 124 countries for the period 1991-2015, we show that a declining oil income may not increase tax efforts of the state under a sizable shadow economy.
• Democratization in oil-based economics as a result of dropping oil income through the channel of taxes may not realize under a high share of informal economy.