The Effect of Replacing Oil Revenue with Tax Revenue on lifetime Welfare by Emphasizing on the Role of Governing Institutions (The model of Overlapping Generations)

Document Type : Research Paper

Authors

1 Department of Economics, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran

2 Professor of Economics, Isfahan University, Isfahan, Iran

3 Assistant Professor of Economics, khomeinishahr Branch, Islamic Azad University, Isfahan, Iran

4 Assistant Professor of Economics, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran

Abstract

Improving the quality of the institutions by attracting investors, will improve growth, development and welfare. However, it is questionable how the improvement of institutional quality in the developing country, which relies on oil resource's revenue, such as Iran, impact on economic growth and welfare. Due to the intergenerational nature of revenues from natural resources, justice dictates that the exploitation of these resources be done in accordance with intergenerational rights. On the other hand, because oil prices are influenced by the other governments policy, oil-rich countries are looking for alternative incomes. One of the justified sources to replace natural resources is tax revenue. The purpose of this article is to analyze the effect of replacing oil revenue with tax revenue, on lifetime welfare in Iran, with an emphasis on the institutions' quality. So the threshold model of oil revenue’s effect on institutions, using the DOLS method over the period 1996:1-2017:1, Estimated. The results show that there is an inverse U-shaped relationship between the share of oil revenue from GDP with all institutions, and the direct relationship between the share of tax revenue from GDP with them. The effect of institutions on lifetime welfare was estimated using OLG Model and SURE method. Some of the institutions had positive, some had negative or no significant effect on lifetime welfare. Scenarios to replace oil with tax revenue show that if reduced oil revenues in the state budget were deposited with the National Development Fund and be replaced by higher wage taxes, lifetime welfare will increase

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References

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