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Aid and Taxation: Is Sub-Saharan Africa Different?

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Aid and Taxation: Is Sub-Saharan Africa Different?

Published: May 13, 2012

Since the Monterrey Consensus in 2002, there has been increasing emphasis on domestic resource mobilization (DRM) to meet the MDGs. Nowhere are the challenges to DRM more pronounced than in sub-Saharan Africa, with its low savings rates, high dependence on foreign aid and weak capacity to mobilize domestic resources. In fact, aid receipts are higher than taxation revenue and also constitute a significant part of government revenue in several African countries. In this paper, we focus on one particular aspect of DRM, namely taxation and the extent to which it is affected by aid, in sub-Saharan Africa over the period 1972-2008. The existing literature has generally found a negative relationship between aid and taxation but the results are very sensitive to data quality and specification problems. We revisit the aid-taxation link using more recent data as well as a new and more detailed dataset by Keen and Mansour (2009), which allows us to focus on revenues that require more state capacity to collect. Controlling for the different determinants of taxation, we find that aid has had no significant impact on taxation generally or in sub-Saharan Africa particularly. Our results are robust to different specifications and time periods, as well as aid thresholds. Drawing on recent findings from five case studies of sub-Saharan countries that identified significant untapped DRM potential in the region (North-South Institute, 2010), we conclude that aid could be better targeted to increase DRM.

Author: Aniket Bhushan and Yiagadeesen Samy

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