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

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 thirty-two countries and six crops from Sub-Saharan Africa. These three variables are statistically and economically relevant predictors of tax regime. Acknowledgements: This paper is based on chapter one of my dissertation and I am particularly grateful to Dani Rodrik for inspiration and guidance. I would also like to thank Robert Bates, Jagdish Bhagwati, Tom Downes, Ann Harrison, John Ittner, Jan Gunning, John McLaren, Gib Metcalf, Ron Miller, Julie Wulf , Jeff Zabel and two anonymous referees for helpful comments. Some data were generously provided by Christine Jones and William Jaeger. ________________________________________ *Economics Department, Tufts University, Medford, MA 02155. phone (617) 627 3137; fax: (617) 627 3917; e-mail: [email protected] JEL Classification Numbers:F14, 011, 012