Foreign Aid and Revenue: Still a Crowding Out Effect?

34 Pages Posted: 1 Nov 2012

See all articles by Dora Benedek

Dora Benedek

International Monetary Fund (IMF)

Ernesto Crivelli

International Monetary Fund (IMF)

Sanjeev Gupta

International Monetary Fund (IMF) - Fiscal Affairs Department

Priscilla S. Muthoora

affiliation not provided to SSRN

Date Written: July 2012

Abstract

This paper reexamines the relationship between aid and domestic tax revenues using a more recent and comprehensive dataset 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 reflection of 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 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: Taxation

JEL Classification: F35, H26

Suggested Citation

Benedek, Dora and Crivelli, Ernesto and Gupta, Sanjeev and Muthoora, Priscilla S., Foreign Aid and Revenue: Still a Crowding Out Effect? (July 2012). IMF Working Paper No. 12/186, Available at SSRN: https://ssrn.com/abstract=2169731

Dora Benedek (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ernesto Crivelli

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Sanjeev Gupta

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Priscilla S. Muthoora

affiliation not provided to SSRN

No Address Available

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