Abstract
Recent work draws attention to the fragility of domestic tax revenues—a vital resource for the developing world—to illicit financial flows. To cope with two major challenges in the illicit financial flows–tax revenues relationship—related to the mere illicit financial flows measurement and reverse causality—this paper exploits the Financial Action Task Force data using an impact assessment analysis. Estimations reveal a significant tax revenue loss in countries associated with important illicit financial flows with respect to comparable countries without important illicit financial flows. Moreover, this causal effect—estimated as being economically meaningful—is supported by a large robustness section, and in particular remains unchanged when using several “doubly robust” estimators. Lastly, it unveils heterogeneities in the impact of illicit financial flows on tax revenues, related to the type of tax—a significant loss for indirect but not for direct taxes—and the considered environment. Therefore, policies combating illicit financial flows—for example, by developing institutions or a sound financial system, as shown by the estimations—may provide additional tax revenues for the developing world.
Highlights
IntroductionBy contributing to the financing of investments in education, health, and various types of infrastructure (such as electricity, roads, ports, highways), they can be a crucial source of economic development (see e.g. Calderón & Servén, 2004)
Domestic tax revenues are a vital resource for the developing world
Before presenting our main results, we report at the bottom of the table several tests to evaluate the quality of our fitting
Summary
By contributing to the financing of investments in education, health, and various types of infrastructure (such as electricity, roads, ports, highways), they can be a crucial source of economic development (see e.g. Calderón & Servén, 2004) Given their importance, a recent strand of literature investigates their fragility notably with respect to illicit financial flows (IFFs), which—by reducing the tax base—can be a potential major source of domestic revenue losses for developing countries (see e.g. Kar & Cartwright-Smith, 2008, 2010; Kar & LeBlanc, 2013; Ndikumana & Boyce, 2003, 2011, 2012).‡. The goal of the present paper is to investigate precisely the link between IFFs and domestic tax revenues mobilization Shedding light on this issue is of primary importance, given the magnitude of IFFs: according to Kar & Spanjers (2015), developing countries illicitly lost around 800 billion USD per year over the period 2004-2013, namely above the yearly net FDI inflows (nearly 650 billion USD), remittances (around 350 billion USD), or official development assistance inflows (ODA, around 82 billion USD).
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