Aid and Taxation: Exploring the Relationship Using New Data

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.

foreign aid; government revenue; taxation.