Aid and Taxation: Exploring the Relationship Using New Data

ICTD Working Paper 21

33 Pages Posted: 17 Sep 2014

See all articles by Oliver Morrissey

Oliver Morrissey

University of Nottingham - Development Economics

Wilson Prichard

University of Toronto - Institute of Development Studies (IDS)

Samantha Torrance

University of Nottingham

Date Written: September 01, 2014

Abstract

This paper examines cross-country evidence concerning the relationship between aid and taxation using a new dataset compiled by the International Centre for Tax and Development (ICTD), and including some extensions to the empirical specification common in the literature. We are unable to replicate the key findings of Gupta et al. (2004) and Benedek et al. (2012), that there is a negative effect of grants on tax effort while loans are positively associated with revenue, and find no support for the broader claim that aid reduces tax effort. In general we find that there is no consistent significant relationship between aid and tax performance. In the specifications where they are significant, net aid, grants and loans are usually positively associated with government revenue, although the significance is often weak and the results are not robust to alternative specifications and estimators. When the analysis is restricted to a sub-sample of Sub-Saharan African countries, the positive effect of loans persists but other aid variables are insignificant.

Keywords: foreign aid; government revenue; taxation

Suggested Citation

Morrissey, Oliver and Prichard, Wilson and Torrance, Samantha, Aid and Taxation: Exploring the Relationship Using New Data (September 01, 2014). ICTD Working Paper 21, Available at SSRN: https://ssrn.com/abstract=2496453 or http://dx.doi.org/10.2139/ssrn.2496453

Oliver Morrissey (Contact Author)

University of Nottingham - Development Economics ( email )

University Park
Nottingham, NG8 1BB
United Kingdom
+44 (0)115 9515475 (Phone)
+44 (0)115 951 4159 (Fax)

Wilson Prichard

University of Toronto - Institute of Development Studies (IDS) ( email )

Library Road
Brighton, Toronto BN1 9RE
United Kingdom

Samantha Torrance

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

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