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Aiding Dependency: a Cross-National Analysis of Foreign Aid and Tax Compliance

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Abstract

This paper argues that foreign aid undermines tax compliance, and examines three causal mechanisms that may undergird this relationship: By leading the recipient state to under-invest in tax enforcement, substituting for the state in terms of service provision, or reducing state legitimacy. To test these arguments, the paper takes advantage of cross-national surveys on individual tax compliance. The results suggest that higher levels of foreign aid are associated with higher levels of refusals to pay taxes. The paper finds evidence that the causal mechanism is aid leading the state to reduce its enforcement of taxation, but not through the substitution of state services or decreasing state legitimacy. The results suggest that aid can have counter-productive effects for the long-term development of recipient countries by lowering the state’s enforcement of taxation, but not by weakening the relationship between state and society.

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Notes

  1. On the other hand, citizens may reward political actors who are seen as attracting international development projects (Cruz and Schneider 2017).

  2. Afrobarometer data, available at http://www.afrobarometer.org/data/merged-data.

  3. Further details on this and other variables from Afrobarometer are found in the appendix.

  4. Only 5.15% of the respondents (5080 out of 98,580) reported not owing income or property taxes. This percentage ranges from a low of 0.53% of respondents in Tunisia to a high of 10.75% in Namibia. See Table 6 in the appendix for the full list of countries.

  5. The World Bank, World Development Indicators (2019). Retrieved from http://data.worldbank.org/indicator

  6. Kaufman, Daniel, Aart Kraay, and Massimo Mastruzzi. (2009). Governance Matters VI. Available at http://info.worldbank.org/governance/wgi/index.asp.

  7. The aid shock variable is developed following the procedure found in Nielsen et al. (2011). First, aid per year was standardized across countries by dividing it by GDP. Then differences in aid between year t and year t-1 were calculated. The largest 15% and the smallest 15% (which included negative values) were considered positive and negative aid shocks, respectively (see Nielsen et al. 2011, 224). For each country that had at least 1 positive aid shock between 2005 and 2016, it received a 1 in a new “positive aid shock” dummy variable column. The same procedure was used to code negative aid shocks. Note therefore that a country can have both positive and negative aid shocks, and indeed 68,771 respondents are coded as living in countries with both types of shocks. The positive and negative aid shocks are positively and significantly correlated (0.8328, *p < 0.005), suggesting the unstable nature of aid flows to Africa.

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Authors and Affiliations

  1. Department of Political Science, Campbellsville University, Campbellsville, KY, USA

    Josiah Marineau

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  1. Josiah Marineau
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Appendix to Aiding Dependency: Cross-National Analysis of Foreign Aid and Tax Compliance

Appendix to Aiding Dependency: Cross-National Analysis of Foreign Aid and Tax Compliance

Information on Main Dependent and Main Independent Variables from Afrobarometer

The dependent variable is question Q26C in the 5th round and is Q27D in the 6th round of the Afrobarometer codebook.

The first interaction term “Ease of Evading” is question Q75C in round 5 and is Q70B in round 6 of the codebook.

The second interaction term, “State Services” question is Q51 in the 5th round codebook.

The third interaction term, “Right to Tax” is Q48C in the 5th round codebook, while it is Q42 in the 6th round codebook.

Table 6 Number of people who claimed to not owe property or income taxes
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Table 7 Multilevel logistic regressions of tax refusal, ease of evading taxes, and state services on aid in 2010
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Table 8 Logic regression models with clustered standard errors of tax refusal, ease of evading taxes, and state services on aid in 2010
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Table 9 Multilevel logistic regressions of tax refusal, ease of evading taxes, and state services on aid with reduced controls
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Table 10 Logistic regressions with clustered standard errors of tax refusal, ease of evading taxes, and state services on aid with reduced controls
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Table 11 Multilevel logistic regression of tax refusals on aid shocks
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Table 12 Logistic regression with clustered standard errors of tax refusals on aid shocks
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Table 13 Multilevel logistic regression of tax refusal on aid and interaction terms
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Table 14 Logistic regression with clustered standard errors of tax refusal on aid and interaction terms
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Marineau, J. Aiding Dependency: a Cross-National Analysis of Foreign Aid and Tax Compliance. St Comp Int Dev 55, 228–256 (2020). https://doi.org/10.1007/s12116-020-09306-5

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