Direct Redistribution and Taxation in Oil-rich Economies: A Proposal

Shantayanan Devarajan, Helene Ehrhart, Tuan Le, Gaël Raballand
unpublished
This paper proposes that, to enhance the efficiency of public spending in oil-rich economies, some or all of the oil revenues be transferred to citizens, and then this amount would be taxed to lead to increased citizens' scrutiny over public expenditures. The authors develop the case as follows. First, they confirm the well-known result that public-expenditure efficiency is lower in oil-rich countries compared with other developing countries. Second, they develop a theoretical model to explain
more » ... hy citizen's scrutiny over public expenditure can be increased by transferring oil revenues to citizens and then taxing them. Being taxed, citizen's information about the level of government revenue available for public goods increases and the citizen wants to ensure that this certain loss of income which was transferred to government budget will be spent on public goods. Third, they confirm empirically that enhanced citizens' scrutiny is associated with more efficient government's spending decisions and that accountability is stronger in countries that rely more on direct taxation to finance public spending. The authors conclude that, while it may be difficult to implement such a proposal in existing oil producers, there is scope for introducing it in some of Africa's new oil producers.
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