Tax Reform and Public Revenue Instability in Developing Countries: Does the Volatility of Development Aid Matter?

Abstract

This paper examines the relationship between tax transition reform, development aid volatility, and public revenue instability in developing countries. Empirical findings show that tax reform exerts a negative effect on tax revenue instability, and the magnitude of this negative effect diminishes as the degree of development aid volatility increases. Specifically, beyond a certain level of development aid volatility, tax reform enhances tax revenue instability. Overall, these findings suggest that higher development aid flows to developing countries should be accompanied by a lower aid volatility so as to ensure that tax reform would generate lower tax revenue instability in recipient countries. © 2019 John Wiley & Sons, Ltd.

Internet, Participation in International Trade and Tax Revenue Instability

“…The tax revenue instability effect of countries' participation in international trade, including through for example greater trade openness, has been discussed recently in Gnangnon and Brun (2019b). On the one hand, trade openness can induce greater instability of tax revenue by enhancing countries' vulnerability to idiosyncratic shocks.…”

“…In contrast with the voluminous literature on the determinants of public revenue, including in developing countries, very few studies have investigated the determinants of tax revenue instability (e.g., Lim, 1983;Bleaney et al, 1995;Ebeke and Ehrhart, 2012;Ebeke, 2014;Gnangnon, 2020b;Gnangnon and Brun, 2019b). Building on these few works, we postulate a dynamic model specification where the dependent variable (i.e., tax revenue instability) is regressed on the indicator of the Internet penetration, and on a set of control variables.…”

“…We have presented in Appendix 2 the descriptive statistics on all variables of model (1), and in Appendix 3, the list of countries utilized in the empirical analysis. Finally, it is worth noting that following many previous studies cited above (e.g., Ebeke and Ehrhart, 2012;Ebeke, 2014;Gnangnon, 2020;Gnangnon and Brun, 2019b), the one-period lag of the dependent variable has been introduced as a regressor. This helps take into account the potential existence of state dependence path in (i.e., the persistence over time of) tax revenue instability, and therefore helps avoid the bias that could be introduced by the omission of this variable in the model.…”

“…In terms of the theoretical effects of control variables on tax revenue instability, we expect that in light of their stronger human resources and institutional capacity, countries with a higher real per capita income are likely to better cope with the adverse effects of shocks on their economies (compared to relatively less advanced countries), and hence mitigate the intensity of tax revenue instability (see also Gnangnon and Brun, 2019b). Thus, we can expect a rise in the real per capita income to be associated with lower degree of tax revenue instability.…”

“…Following for example Gnangnon and Brun (2019b), we postulate that greater economic growth volatility, higher inflation volatility, and a rise in terms of trade instability would translate in higher fluctuations of the tax base elements, and result in higher tax revenue instability. The effect of development aid volatility on tax revenue instability has been discussed in Gnangnon and…”