Foreign Aid And Domestic Taxation Systems

Beschreibung

Does foreign aid strengthen or weaken domestic institutions in recipient countries? We examine the effect of foreign aid on tax systems in developing countries. Our theory makes use of the variation in the financial terms of aid (grants versus loans) and the identity of the donor (China versus the United States).
We hypothesize that aid provided in the form of bilateral loans improves revenue collection, while aid in the form of grants undermines the performance of tax systems. Loans must be repaid while grants do not. Therefore, loan recipients have an incentive to reform their tax systems to generate revenues for loan repayment, while governments receiving grants do not have such reasons.
In addition, we hypothesize that the identity of donors shapes the structure of tax systems. In particular, donor identity matters for the relative reliance on taxes on trade versus taxes on domestic income. Western governments often emphasize reducing barriers to trade, which removes the ability to tax trade. Consequently, developing countries receiving much western aid compensate the loss of trade tax revenues with increased taxes on domestic income, profits, and capital gains. In contrast, assistance from emerging creditors such as China frequently requires recipients to purchase goods and services from the creditor country. Therefore, developing countries receiving much aid from emerging creditors expand the use of taxes on trade flows to participate financially in the increased flow of goods and services.
We test our hypothesis with data for 121 developing countries between 1990 and 2015. Utilizing exogenous variation to aid and loan flows, we find strong support for our hypotheses.

Zeitraum	2 Nov. 2018 → 3 Nov. 2018
Ereignistitel	Annual Meeting of the International Political Economy Society
Veranstaltungstyp	Konferenz
Ort	Boston, USA/Vereinigte Staaten, MassachusettsAuf Karte anzeigen
Bekanntheitsgrad	International