Governance and tax revenue: does foreign aid matter?

Abstract

This study seeks to explores the relationship among governance, foreign aid, and tax revenue. A common notion on governance is that it is a multifaceted factor, it may affect from other factor that is foreign aid. Foreign aid can hamper the governance situation and thus can reduce tax collection. To test these theoretical assumptions, we collected the numerical data from Asian economies for the years 2001–2019 and employed the panel FMOLS (fully modified ordinary least square) test to estimate the regression. The empirical findings first reveal that governance and foreign aid have a positive association with tax revenue in the long run. However, a negative trend in tax collection was observed following the interaction of foreign aid and governance. Foreign aid deteriorates the governance situation, which has a negative spillover impact on tax revenue. Our empirical analysis suggests that policy officials should focus on exercising governance and foreign aid effectiveness to meet the objective of more tax collection. Points for practitioners Policy officials should focus on better governance exercises. They should carefully decide on the volume of foreign aid receipts. However, if it becomes necessary to receive foreign aid, then they should focus on aid effectiveness. Such steps can benefit the practitioners to collect more tax.