Can tax regimes shape incentives to engage in armed conflict? This analysis links a central-government iron-ore tax reform to local violence and illegal extraction in India's Maoist belt.
🔎 Policy Shock and Institutional Context
- A 10% ad valorem tax on iron ore was introduced at the central level. Although the central government set the tax, the resulting mining royalty revenues accrue to state governments.
- The affected area overlaps with India’s Maoist (Red Corridor) mining belt, a mineral-rich region where state governments are responsible for counterinsurgency operations.
- The tax reform increased royalty collections for impacted states by a factor of 10.
📍 How the reform was analyzed
- The introduction of the 10% tax is exploited as a policy shock to compare outcomes across districts with and without important iron ore deposits before and after the change.
- Geographic variation in mineral endowments and the timing of the tax are used to isolate the policy’s local effects on conflict and extraction.
📈 Key Findings
- The royalty hike was followed by a significant intensification of violence in districts that contain important iron ore deposits.
- The policy change was also followed by an increase in illegal mining activity in iron mines.
- The tax raised state-level royalty revenues by about tenfold, creating a clear fiscal incentive tied to local mineral resources.
⚖️ Why It Matters
- These patterns indicate that tax-induced fiscal gains can alter local incentives in conflict-prone settings, linking fiscal policy to both escalation in armed conflict and illicit resource extraction.
