Hydrocarbon Revenues, the Non‐Hydrocarbon Tax Offset, and the Government Policy Mix

ABSTRACT

The paper investigates the influence of the government policy‐mix choices of fiscal, exchange rate, and monetary policies, as reflected in reserve money changes, on government tax effort and the non‐hydrocarbon tax offset. We find a positive association between changes in reserve money and the non‐hydrocarbon tax offset. Hydrocarbon‐dependent countries that rely more on seigniorage or allocate a larger share of hydrocarbon revenues to the current budget will exhibit higher reserve money growth and reduced tax effort. The combined effect of hydrocarbon revenues and reserve money growth indicates that tax effort is significantly lower than previously suggested in the literature, with a tax offset of approximately 60%, implying higher adjustment costs and a greater need to develop tax capacity in hydrocarbon‐dependent countries. Furthermore, reserve money growth conditions the magnitude of the non‐hydrocarbon tax offset arising from hydrocarbon revenues.