The impact of resource taxation on resource curse: Evidence from Chinese resource tax policy

Abstract

The existence, causes, and mechanism of the “resource curse,” whereby resource-rich regions underperform in economic growth, have been fully discussed, but the impacts of resource taxation on the resource curse have not been thoroughly investigated. To bridge this gap in the literature, this study advances literature by examining the impact and mechanism by which resource taxes affect the resource curse. We seek to shed light on the differentiated role of specific tax and ad valorem tax in alleviating the resource curse. Based on the panel data of 114 resource-based prefecture-level cities in China, we empirically investigate the impact of resource taxes on economic growth and resource curse using a difference-in-difference model, finding that the policy adjustment of the Chinese resource tax from a specific tax to an ad valorem tax significantly restrained the economic growth of pilot cities while exacerbating their susceptibility to the resource curse through two mechanisms: an output-inhibiting effect and a supply-side Giffen effect. These findings have various implications for governments of resource-rich economies as they seek to adjust and optimize resource taxes to avoid the resource curse.