The impact and externalities of natural disasters on local tax revenue in Colombia

ABSTRACT

This paper studies the impact of natural disasters on tax revenue across Colombian municipalities. We follow a two-step approach to evaluate how a municipality’s tax revenue depends on natural disasters taking place both locally and in its trade partners. In the first step, we estimate a gravity model of bilateral trade and construct a matrix of estimated bilateral trade shares, allowing us to measure the strength of the economic relationships between municipalities. In the second step, our results reveal that natural disasters in the destination municipalities increase the tax revenue in the origin cities.

KEYWORDS:

• tax revenue
• natural disasters
• gravity
• spatial externalities
• municipalities
• Colombia

JEL:

• H0
• H70
• H71
• Q54

ACKNOWLEDGEMENTS

We thank the editor and three anonymous reviewers for their constructive comments. The opinions contained in this paper are the sole responsibility of the authors and not the Banco de la República or its board of directors.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

Notes

1. According to data from the World Bank, Colombia had a quality of infrastructure related to trade and transportation index of 2.67 in 2018 (1 = Low, 5 = High), higher than the Latin American average (2.49), but lower than average across Organisation for Economic Co-operation and Development (OECD) members (3.56).

2. We are aware that other mechanisms such as labour migration and companies’ relocation may exist, but we cannot control for all forms of spatial spillovers here because of lack of relevant data. We provide evidence of one mechanism through which natural disasters affect the distribution of tax revenue across regions: trade.