Remittances and Public Finances: Evidence from Oil-Price Shocks

Abstract

We study the effect of inflowing remittances - a major source of capital for many countries - on tax-revenues and tax-policy. Instrumenting remittances with changes in the oil-price interacted with a country's distance to oil-producing countries, we find that remittances have a large positive effect on VAT revenues but no effect on income-tax revenues. This suggests that remittances often escape the income tax but can be taxed via consumption. We further show that tax policy is responsive to shocks in incoming remittances: remittances make the adoption of VAT-systems more likely, and they lead to lower VAT-rates and higher income-tax rates.

Keywords: Remittances, Tax revenue, Tax policy, Value added tax, Personal income tax, Migration, Development

JEL Classification: F24, H20, O23