Achieving Sustainable Development Goal 17? An Empirical Investigation of the Effectiveness of Aid Given to Boost Developing Countries’ Tax Revenue and Capacity

Abstract

Abstract Developing economies need to increase their tax revenue. The international community is keenly aware of this challenge and recently dedicated substantial resources and advocacy to assist countries in mobilizing domestic tax revenue as part of the Sustainable Development Goals. Considering, however, the extensive research that foreign aid is often ineffective, it is not obvious that this tax assistance will help developing countries raise revenue. In this article, we assess the impact of international assistance programs for tax purposes (i.e., tax aid) on tax revenue generation, indirect taxation reform, and informality across the developing world. We analyze panel data of 137 developing countries between 1972 and 2013 from the AidData, International Centre for Tax and Development, and World Development Indicators, and World Bank Project Data datasets. We also assess survey data from the World Bank's Enterprise Survey and World Values Survey. Our findings indicate that tax aid does not robustly increase the number of taxpayers, especially in the short run. However, tax aid is effective in generating domestic tax revenue in precisely the way international agencies advocate, namely a strong reliance on the value-added tax. The data underlying this article are available on the ISQ Dataverse, at https://dataverse.harvard.edu/dataverse/isq.

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