Journal Article

Heterogeneous Aid Effects on Tax Revenues: Accounting for Government Stability in WAEMU Countries

Hermann D. Yohou, Michaël Goujon and Wautabouna Ouattara

in Journal of African Economies

Volume 25, issue 3, pages 468-498
Published in print June 2016 | ISSN: 0963-8024
Published online June 2016 | e-ISSN: 1464-3723 | DOI: https://dx.doi.org/10.1093/jae/ejw003
Heterogeneous Aid Effects on Tax Revenues: Accounting for Government Stability in WAEMU Countries

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  • International Finance
  • Taxation, Subsidies, and Revenue
  • Single Equation Models; Single Variables
  • Economywide Country Studies

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Using a panel threshold model, we examine the heterogeneous effects of foreign aid on tax revenue due to government stability in the West African Economic and Monetary Union countries over the period 1986–2010. Panel Smooth Threshold Regressions indicate the existence of strong threshold effects in the aid–tax relationship depending on the level of government stability. They also indicate that the effect of aid on tax revenue is gradual and varies across countries according to the level of government stability. We find that aid directly reduces tax revenues but for higher levels of government stability it enhances tax performance. We provide estimates of country time-varying coefficients of aid effect. We find on average a positive impact of aid. However, the size of this impact is very small, suggesting that there is still much to do at the institutional level to improve the effectiveness of aid for tax performance in WAEMU countries.

Keywords: foreign aid; government stability; tax revenue; PSTR; WAEMU; F35; E02; H20; C23; C24; O55

Journal Article.  12159 words.  Illustrated.

Subjects: International Finance ; Taxation, Subsidies, and Revenue ; Single Equation Models; Single Variables ; Economywide Country Studies

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