The impact of declining oil rents on tax revenues: Does the shadow economy matter?

Abstract

Abstract We study the association between oil rents and tax revenues, highlighting the importance of the shadow economy (SE) as a moderating factor in this relationship. Declining oil rents may not lead to higher tax efforts in a state if the SE is sizable. Using a sample of 124 countries from 1991 to 2015, our panel data regression analysis illustrates the moderating role of the SE in the final effect of negative oil rent shocks on tax revenues. A decline in oil rents following negative oil price shocks ceases to have any significant positive impact on tax revenues in countries with an SE representing more than 35% of gross domestic product. The results are robust after controlling for country- and year-fixed effects, other determinants of tax revenues, and using a dynamic model.