| Why do governments tax primary exports at rates that are ultimately self-defeating? The answer lies in the time inconsistent nature of a low tax policy. A government strapped for revenue always has an incentive to announce low taxes today in order to get farmers to plant. Once the harvesting season arrives however, the government can revert to a high tax policy by cheating farmers out of sunk costs. Alternatively, by sticking to a low tax policy, the government ensures continued planting and the associated future export earnings. In Chapter One, I show that whether a low tax policy is sustainable depends on three variables: the ratio of sunk costs to total costs; how heavily future revenue is discounted; and expected future export earnings. I use data on taxation, leadership duration and profitability to test this theory for 32 countries and six crops from Sub-Saharan Africa. Results indicate that cocoa, coffee and vanilla, the three crops with the highest ratio of sunk costs to total costs, tend to be taxed more heavily than cotton, groundnuts and tobacco, the three crops with the lowest ratio of sunk costs to total costs. Using the probability of remaining in power as a proxy for the discount factor, I also show that the likelihood of being in a low-tax regime is increasing in the discount factor. And finally, crops for which expected future profits are greatest tend to be less heavily taxed. In Chapter 2, I show that tax policy is an important determinant of growth. And finally, in Chapter 3, I examine the links between foreign direct investment and domestic investment. |
