OxCARRE Seminar: Federal Tax Shocks and State Fiscal Capacity: The Case of Natural Resources

Today, OxCARRE's Ohad Raveh presents his paper, joint with Fidel Perez-Sebastian [fae.ua.es] and Yaniv Reingewertz [weebly.com] on

Federal Tax Shocks and State Fiscal Capacity: The Case of Natural Resources

abstract:

How do states respond to federal fiscal shocks? In this paper we present a new mechanism of vertical fiscal externalities, by investigating the heterogeneous effects of federal fiscal shocks. While federal tax changes are equal across states, their effects are not. We exploit the variation in states' fiscal capacity, observed through the case of natural resources, to examine these heterogeneous effects. Consistent with previous studies, we find that increases in federal tax rates are contractionary for the average state, yet are mitigated, or even reversed in those with high fiscal capacity. We offer a theory of inter-regional competition that rationalizes this finding: states with high fiscal capacity make a relatively smaller increase in tax rates in response to a federal tax hike, triggering capital movement from low to high fiscal capacity states which, in turn, creates an expansionary (contractionary) effect in the latter (remaining) states. We provide evidence for this mechanism by examining narrative-based federal tax shocks, and various state-level characteristics, in the U.S. economy.

Draft not yet available

Edit: The abstract was for a different paper, here [oxcarre.ox.ac.uk]

UK considers tax decreases to support North sea oil industry

Based on a report by Oil and Gas UK, an interest representing group, that pictures a grave outlook for the industry's activities in the North Sea, the FT [here and here] and the Guardian [here] report that the government is considering corporate tax breaks for the industry in order to stimulate further investment and avoid the scrapping of new projects. Taxes went up when prices were high, taxes may go down when prices are low.

The government's main interest, supposedly, is to maximise tax revenue from oil production and use. Lowering corporate taxation now may insure that new projects are not shelved, but instead developed bringing revenues for many years. Some of the immediate revenues for the government would be given back to the industry to assure 'profitability'. If not through taxation the industry may have to find different means of cutting costs, with as ultimate measure ending production in individual
projects. The question remains whether the government would need to help with this through taxation policy or whether a future oil price increase and technological innovation triggered by hard times would take care of it. Is there really no time to wait a few quarters to see what happens with the oil price?

The call for corporate tax reductions for the oil industry stands in contrast to the calls during the past months [see earlier posts starting here] to increase consumer tax on fossil fuel use based on carbon content.  I'm speculating here, but part of the immediate tax rate decrease may actually be financed by increasing the tax on consumer use of carbon, in some revenue neutralising way of swapping consumer surplus to the oil industry. Why not?  

OxCARRE Trip to Azerbaijan

From 20 to 24 February, Gerhard Tows, Thomas Nielsen (LSE) and Wessel Vermeulen joined a group of researchers and practitioners, many associated with the Centre for Euro-Asian studies at Reading University, for a workshop on "Sustainable development in resource rich countries" at Khazar University in Baku, Azerbaijan. The workshop was made possible through support of the British Council in Azerbaijan.

During the conference we discussed with students, professors, representatives of SOFAZ (The sovereign wealth fund of Azerbaijan) and SOCAR (the state energy company) on matters such as development of resources, governance, macroeconomic management and international linkages. The delegation from the UK was able to offer new and critical views on the current state of knowledge on how to manage resources in a country such as Azerbaijan, while our hosts were able to highlight how Azerbaijan is coping with the large increase of revenues in recent years and the current situation where revenues are expected to decline rapidly in line with the fall of the oil price. Additionally, it was an occasion to share research ideas and methods with the potential of future collaborations and joined-projects between researchers from universities in the UK and Azerbaijan.

The city of Baku is an almost surreal mixture of new property development, large and modern architectural structures, with a carefully renovated historic centre, whereas only a few kilometres out of the centre gives a picture on what is probably the situation of the large majority of the people of Baku and supposedly the rest of the country. A distinctively less wealthy part of town, around soviet-era structures, but an also more lively buzz on the streets and around small shops and teahouses.

In the short time we were in Baku, and given the time left after the main sessions we were able to taste a little from the new Baku and how people view the development of Azerbaijan as an important oil and gas supplier for Europe. There is proudness in this thought but also acknowledgement of the often inefficient ways the riches are used in domestic spending and investment, and disappointment in the way that critical views are under-appreciated. The government of Azerbaijan has a large responsibility to shoulder. We hope that with our visit to the country we have contributed positively, if only in a small way, in showing how it can find the best way of using its new found riches for the benefit of the entire population.

For more information on Azerbaijan and its natural resources, see the NRGI website, which offers plenty of new developments. For instance, the country risks being expelled from the EITI program soon after having severely cracked down on voices from civil society that had critical views of the government. A country report [nrgi.com] on Azerbaijan from RevenueWatch, now NRGI, gives a fairly good overview of the situation, including recommendations the country has received from various international organisations and independent institutions.

New Research: 'Oil Above Water'

Vincenzo Bove (University of Warwick, profile [warwick.ac.uk]), Kristian Skrede Gleditsch (University of Essex, profile [essex.ac.uk]), and Petros G. Sekeris (University of Portsmouth, website) write on,

"Oil above Water": Economic Interdependence and Third-party Intervention

Abstract:

We explore economic incentives for third parties to intervene in ongoing internal wars. We develop a three-party model of the decision to intervene in conflict that highlights the role of the economic benefits accruing from the intervention and the potential costs. We present novel empirical results on the role of oil in motivating third-party military intervention. We find that the likelihood of a third-party intervention increases when (a) the country at war has large reserves of oil, (b) the relative competition in the sector is limited, and (c) the potential intervener has a higher demand for oil.

Forthcoming in Journal of Conflict Resolution 

Jacques Delors (Former President of the European Commission) on a European Energy Policy.

Jacques Delors writes [energypolicyblog.com] to back a new phase in European integration focussing on energy. His letter is backed by a report [delorsinstitute.eu] written by the Jacques Delors institute.

Some quotes, my emphasis.

Making this a priority in Europe involves placing energy efficiency on an equal footing with other energy resources, and to deal with them together as part of a single energy transition. To make this happen, a decisive step must be taken towards the transition, guided by a stable and credible carbon price. The optimum instrument, in particular against the backdrop of a downward trend in oil prices, remains EU-wide carbon taxation. At the same time, subsidies for fossil fuels must be phased out as soon as possible.

Apparently aware that some major energy producers are not in the EU, he writes

Relations with immediate neighbours must be strengthened with a view to creating a pan-European area already outlined by the European Energy Community, without forgetting the Mediterranean countries. Energy relations with Norway and Switzerland must be embodied in more extensive partnerships than that of ETFA or the EEA. Similarly, relations with Russia and Turkey must be taken to a strategic level that reflects the interdependence of our respective economies rather than counting on short-term actions lacking an overall vision.

Based on the report, Switzerland is singled out for being less integrated in the EU energy market than Norway, while there may be substantial advantages in integrating in the European energy network. Turkey features as a strategic partner as a major (future) transit country for gas.

OxCARRE seminar: James Fenske, Oil and ethnic inequality in Nigeria

Today's OxCARRE's brownback seminar at 12h has James Fenske presenting his paper with Igor Zurimendi, on

Oil and Ethnic inequality in Nigeria. 

Abstract

Oil prices experienced in early life predict differential adult outcomes across Nigerian ethnic groups. Our difference-in-difference approach compares members of south- ern ethnicities to other Nigerians from the same birth cohort. Greater prices in a southern individual’s birth year predict positive relative outcomes, including reduced fertility, de- layed marriage, higher probabilities of working and having a skilled occupation, and greater schooling. By contrast, health outcomes suffer, including reduced height and increased BMI. These microeconomic impacts can be explained by macroeconomic responses to greater oil prices. Relative Southern incomes increase, food production declines, maternal labor inten- sifies, and Southern conflict rises.

See here for the earlier post, here for the working paper

New OxCARRE research. New discussion papers from January

January has seen some new discussion papers submitted to the OxCARRE website.

Intergenerational Inequality Aversion, Growth and the Role of Damages: Occam's rule for the global carbon tax by Armon Rezai & Rick van der Ploeg


The Relationship Between Oil Price and Costs in the Oil and Gas Industry by Gerhard Toews & Alexander Naumov


News Shocks in Open Economies: Evidence from Giant Oil Discoveries by Rabah Arezki, Valerie A Ramey & Liugang Sheng


Seven Principles for Managing Resource Wealth by Sam Wills.


and finally a forthcoming paper

Dutch Disease and the Mitigation Effect of Migration: Evidence from Canadian Provinces, by Michel Beine, Serge Coulombe & Wessel Vermeulen