Why Kill the Golden Goose? A Political-Economy Model of Export Taxation

Abstract

Why do governments tax exports at rates that are ultimately self-defeating? An answer may lie in the time-inconsistent nature of a low-tax policy. Using a dynamic model of export taxation, I show that the sustainability of a low-tax policy depends on three variables: the ratio of sunk costs to total costs, how heavily future export revenue is discounted, and expected future export earnings. Using data on taxation, leadership duration, and profitability, I test this theory for 32 countries and six crops from Sub-Saharan Africa. These three variables are statistically and economically relevant predictors of tax regime. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology