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A substantial amount of aid to developing countries is given to the government, or goes through the budget, meaning it should have an impact on government fiscal behaviour (particularly on government spending). The few existing cross-country empirical studies on the effects of aid on government spending neglect time series properties, cross-country (recipient) heterogeneity and the potential for cross-country correlation. This paper examines the impact of foreign aid and taxes on government spending for a sample of 69 developing countries over 1980-2013, taking account of dynamics characterising fiscal data, cross-country heterogeneity and the distorting impact of cross-section dependence, by applying the Pesaran (2006) CCE Mean Group estimator. We show that spending, net aid (as well as variants including grants and loans) and taxes comprise an equilibrium (cointegrated) relation. Our results provide robust evidence of a positive, long-run (as well as short-run) association between aid and spending. On average, the aid coefficients are positive but smaller than the tax coefficients, indicating that in the long-run and short-run taxes have a stronger association with expenditures than aid.

The main argument of this paper is that there is considerable heterogeneity in the way aid can shape tax performance in developing countries: through behavioural effects, donor conditionality, recipient policy reform and technical assistance; and these effects are country-specific. We investigate these effects by applying the dynamic Common Correlated Effects Mean Group estimator to a dataset comprising 84 developing countries from 1980 to 2013. The following results ensued: aid and taxes comprise an equilibrium relation, with a positive long-run association between aid and taxes; causality runs from aid to taxes, suggesting that on average, changes in aid induce permanent changes in taxes.

AbstractWe argue that tax revenues and political institutions placing constraints on the executive power may reinforce each other over time and so co-evolve in the long run. This may also bring a shift in the composition of revenues, from taxes levied on a narrow base to broadly levied taxes. To test these hypotheses, we use historical cross-country data covering 31 countries for 1800–2012 and panel time series methods allowing for different forms of country-specific heterogeneity and cross-section dependence. The results offer three main findings. First, executive constraints, whether they are judicial or legislative, and tax revenues are cointegrated. While in the short run they can drift apart, this will be temporary because there is a long-run relationship between the two. Second, evidence of cointegration is strongest for revenues from direct taxes, suggesting that the existence and nature of a long-run relationship may be mainly related to the emergence of broad-based taxation. Third, long-run causality runs mostly from executive constraints to taxation. This is most evident for income taxes. Our findings link Sustainable Development Goals 16 and 17, implying that the goal of promoting inclusive and accountable institutions may work in synergy with that of generating internal resources to finance development goals.

We argue that tax revenues and political institutions placing constraints on the executive power may reinforce each other over time and so co-evolve in the long run. This may also bring a shift in the composition of revenues, from taxes levied on a narrow base to broadly levied taxes. To test these hypotheses, we use historical cross-country data covering 31 countries for 1800- 2012 and panel time series methods allowing for different forms of country-specific heterogeneity and cross-section dependence. The results offer three main findings. First, executive constraints, whether they are judicial or legislative, and tax revenues are cointegrated: there is a long-run relationship between the two. While in the short run they can drift apart, this will be temporary because they tend to co-evolve. Second, evidence of cointegration is strongest for revenues from direct taxes, suggesting that the existence and nature of a long-run relationship may be mainly related to the emergence of broad-based taxation. Third, long-run causality runs mostly from executive constraints to taxation. This is most evident for income taxes. Our findings link Sustainable Development Goals 17 and 16, implying that the goal of promoting inclusive and accountable institutions may work in synergy with that of generating internal resources to finance development goals.

Attention on domestic resource mobilization-particularly in developing countries- has increased significantly in recent years. This stems from, among other things, recognition in the Sustainable Development Goals that further domestic funding is required for development needs, and the Addis Tax Initiative, which aims to foster fairer and more effective domestic resource mobilization. And whilst there is a recognition that many low- and middle-income countries could be collecting more in tax revenues, the answer to the question of just how much more is unclear. So-called tax effort studies have attempted to shed light on this question for many years and recent estimates suggest that many developing countries are not performing anywhere near their potential (i.e. exerting enough effort). This study makes two significant contributions to the tax effort literature. First, we find that the stochastic frontier approaches used in many recent studies are sensitive to empirical specification and the resulting tax effort scores are strongly influenced by outlying input observations. We employ the True Random Effects approach and find that tax effort scores are, on average, higher and more tightly distributed than previous studies suggest. Second, we enjoy improved data coverage due to using the most recent version of the UNUWIDER Government Revenue Dataset, alongside governance indicators from the V-Dem dataset. This allows us to present tax effort estimates for 50 per cent more observations than the next most complete study.