examined the effect of resource revenues on countries’ non-resource revenues and have generally found a crowding-out effect. In a sample of 30 hydrocarbon-producing countries for the period 1992-2005, Bornhorst, Gupta, and Thornton (2009) find that a unit increase of hydrocarbon revenues is associated with a decline in total non-hydrocarbon revenues of about 0.2 percentage points of GDP. Crivelli and Gupta (2014) extend the Bornhorst, Gupta, and Thornton (2009) study to 35 countries for 1992-2009, and analyze the impact of expanding resource revenues on different types of domestic (non-resource) tax revenues. They find that an increase in resource revenues of 1 percentage point of GDP lowers aggregate domestic revenue by 0.3 percentage point of GDP, which is mainly explained by a decline in revenue from taxes on goods and services. Ossowski and Gonzáles (2012), with a sample of 15 Latin American and Caribbean countries, also find that revenues from nonrenewable resources tend to reduce non-resource revenue performance. Botlhole (2011) and Thomas and Trevino (2013) find similar results for Sub-Saharan African countries.

Unlike in developed countries where there is enough revenue to deliver adequate public services, a critical issue for developing countries, in need of more revenue, is therefore about how to avoid or reduce the crowding out of non-resource revenue by resource revenue. The critical role that institutional quality plays in tax revenue performance is explored in recent studies. For instance, El Anshasy and Katsaiti (2013) find that natural resources tend to hinder economic growth when a country has low-quality institutions. Bhattacharyya and Hodler (2014) find that resource revenues tend to hinder financial development in countries with weak political institutions; this negative effect decreases and vanishes as the quality of political institutions improves. Bird, Martinez-Vazquez, and Torgler (2008) and Bird, Martinez-Vazquez, and Torgler (2014) show that beyond traditional supply factors, the quality of institutions is a significant determinant of revenue mobilization in developing countries as well as in the developed world.

However, only a few existing studies have focused on the role that a better quality of institutions could play in avoiding (or at least lessening) the likelihood that tax revenue from resources (in resource-rich countries) will crowd out existing tax revenues. For instance, Botlhole (2011) shows that institutions are essential for ensuring natural resource taxes increase overall tax revenue. Their results suggest that more resource revenues impede tax revenue collection only in the absence of good governing institutions. Bornhorst, Gupta, and Thornton (2009) and Thomas and Trevino (2013) also find similar results. Ross (2013) argues that income from non-resource sources (agriculture, manufacturing and services) is more beneficial than income derived from the sale of assets such as oil reserves, which has significant political consequences. Rabah and Gylfason (2013) have argued that the quality of democratic institutions in resource-rich countries could explain the observed crowding out effect of resource tax revenues. They maintain that authoritarian regimes often deliberately reduce non-resource tax rates to quell the masses when they protest about not receiving their fair share of the resource rents. Clearly, from the point 2