Who Profits from Windfalls in Oil Tax Revenue? Inequality, Protests, and the Role of Corruption

CAEPR WORKING PAPER SERIES 2021-004

46 Pages Posted: 20 Sep 2021

See all articles by Michael Alexeev

Michael Alexeev

Indiana University Bloomington - Department of Economics; Russian Presidential Academy of National Economy and Public Administration

Nikita Zakharov

University of Freiburg - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2021

Abstract

We investigate the relationship between oil windfalls and income inequality using the subnational data of one of the resource-richest and most unequal countries in the world – Russia. While previous literature has produced contradictory findings due to the use of an aggregate measure of oil rents in mainly cross-national settings, we focus exclusively on the oil rents that accrue to the subnational governments across one country. Our estimation strategy takes advantage of the two unique features of Russian oil taxation: 1) the change in oil-tax policy when sharing oil-extraction taxes with local budgets was discontinued; 2) the oil-tax formula tied directly to the international oil prices allowing to use the oil price shocks as an exogenous change in oil rents. When we look at the period with oil-tax revenues shared with the regional governments, we find that oil windfalls had increased income inequality and benefited the wealthiest quintile of the population in regions with more intense rent-seeking. Further, the positive oil price shocks combined with increased rent-seeking reduced the share of labor income but increased the income share from unidentified sources traditionally attributed to corruption. These effects of oil windfalls disappear after the Russian government discontinued oil-tax revenue sharing with regional governments. Finally, we examine the potential political implications of the rising inequality due to the appropriation of the oil windfalls. We find its positive effect on the frequency of protests associated with grievances among the poor and disadvantaged social groups; this effect, however, exists only in relatively democratic regions.

Keywords: Oil, Decentralized Revenues, Income Inequality, Corruption, Protest, Russia

JEL Classification: D63, D73, Q35, Q38, P48

Suggested Citation

Alexeev, Michael V. and Zakharov, Nikita, Who Profits from Windfalls in Oil Tax Revenue? Inequality, Protests, and the Role of Corruption (September 1, 2021). CAEPR WORKING PAPER SERIES 2021-004, Available at SSRN: https://ssrn.com/abstract=3924950 or http://dx.doi.org/10.2139/ssrn.3924950

Michael V. Alexeev (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall 105
Bloomington, IN 47405-6620
United States

Russian Presidential Academy of National Economy and Public Administration ( email )

pr. Vernadskogo, 84
Sredny av. V.O., 57/43
Moscow, St. Petersburg 119571
Russia

Nikita Zakharov

University of Freiburg - Department of Economics ( email )

Freiburg, D-79085
Germany

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