The Resource Curse and Taxation in Latin America: A Paradox of Plenty or a Contingent Blessing?

Abstract

Despite recent scholarly interest into the effects of natural resource wealth, on the one hand, and tax outcomes, on the other, these two areas of inquiry have developed independently of one another. Correcting for the lack of crosspollination between these literatures, this article explicitly examines the impact of commodity price fluctuations on tax regimes. Against the predictions of the resource curse, which posits that raw material wealth causes institutional atrophy, the author argues that tax apparatuses can dynamically respond to resource price cycles. Specifically, states will deprioritize non-commodity tax collection during windfalls and exert greater effort to increase tax receipts when resource prices plunge. Using time-series cross-sectional data to evaluate the effects of commodity income fluctuations on tax outcomes in Latin America, the author finds a robust negative relationship between natural resource revenues and tax effort. In defiance of the expectations of the traditional literature, this article determines that tax institutions in resource-rich states demonstrate great flexibility, with non-commodity tax receipts moving in the opposite direction as natural resource income.