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Foreign Aid and Revenue: Still a Crowding-Out Effect?

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Abstract:

This paper analyzes the relationship between aid and domestic tax revenues using a more recent and comprehensive data set covering 118 countries for the period 1980–2009. Overall, our results support earlier findings of a negative association between net official development assistance (ODA) and domestic tax revenues, but this relationship appears to have weakened in response to greater efforts at mobilizing domestic revenues in many countries. The composition of net ODA matters: ODA grants are associated with lower revenues, while ODA loans are not. The paper further finds that net ODA and grants are negatively associated with VAT, excise tax, and income tax revenues, but have a positive relationship with trade taxes. Aid has a particularly strong negative effect on domestic tax revenues in low-income countries and in countries with relatively weak institutions.

Keywords: FOREIGN AID; TAXATION

Document Type: Research Article

DOI: http://dx.doi.org/10.1628/001522114X679156

Publication date: March 1, 2014

More about this publication?
  • As one of the world's oldest professional journals in public finance, founded in 1884, FinanzArchiv (FA) publishes original work from all fields of public economics which are of interest to an international readership, e.g. taxation, public debt, public goods, public choice, federalism, market failure, social policy, and the welfare state. Special emphasis is on high-quality theoretical and empirical papers on current policy issues.

    FA is a peer-reviewed journal commited to a prompt turnaround of submissions.

    FA is listed in the Social Science Citation Index (SSCI), in Current Contents/Social and Behavioral Sciences, in Econ Lit, in the Journal of Economic Literature, in IDEAS and RePEc and in the International Bibliography of the Social Sciences.

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