Effect of Development Aid on Tax Reform in Recipient-Countries: Does Trade Openness Matter?

Abstract

Based on a proposed measure of tax reform in developing countries, this paper examines both how tax reform is influenced by development aid flows, and whether this effect depends on countries’ degree of openness to international trade. Tax reform involves here the change of the tax structure in favor of domestic tax revenue and at the expense of trade tax revenue. Empirical results based on 102 developing countries over the period 1980–2015 suggest that development aid exerts a positive effect on tax reform in developing countries, with relatively less advanced countries enjoying a higher positive effect than advanced developing countries. Additionally, recipient-countries’ degree of trade openness matters for the effect of development aid on tax reform.