Aid and Taxation: Evidence from Ethiopia

Giulia Mascagni

Working Paper Series from Department of Economics, University of Sussex Business School

Abstract: The relation between aid and tax has been largely debated in the literature, given its far-reaching consequences: the presence of a crowding-out effect of aid on domestic revenue would seriously impair the sustainability of the development process. This paper explores this relation by adopting a case-study approach, which overcomes some of the common limits of the cross-country literature. I use time series data for Ethiopia for 1960-2009, a longer time series than most country studies of this kind. The estimation is based on an error correction model that allows separating long-run equilibrium relations and short-run dynamics. The analysis shows that both foreign grants and loans have a positive relation with tax revenue in Ethiopia. This effect seems to be robust to endogeneity and to structural breaks, although clearly establishing causality remains a challenge. The results show that aid has a beneficial effect on tax revenue, which may be due to its role in supporting fiscal reforms and improvements in tax administration.

Keywords: Foreign Aid; Taxation; Grants; Loans; Ethiopia (search for similar items in EconPapers)
JEL-codes: F35 O23 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-afr
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:sus:susewp:7314

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