Aid and national tax capacity: Empirical evidence from Chinese aid

Examining the influence of aid on the tax capacity of the recipient is crucial for assessing aid efficacy. This study investigates the effects of Chinese aid on the tax capacity of recipients from 2000 to 2017. Using panel data from 134 countries, the analysis reveals a significant increase in the tax-to-GDP ratio of aid recipients due to Chinese aid. Expanding the tax base and enhancing tax revenue demand serve as crucial pathways of impact. Differential analysis between Official Development Assistance (ODA) and Other Official Flows (OOF) demonstrates the consistent positive effect of OOF on taxation, with no compelling evidence to indicate that grant-based ODA would supplant taxation. Conversely, When both OOF and ODA are provided simultaneously, ODA contributes to increasing the recipient's tax-to-GDP ratio. These findings withstand rigorous sensitivity tests and hinge on several key factors, such as geographical distribution, corruption levels, and initial tax-to-GDP ratio. Structural impact assessments demonstrate that aid elevates the ratios of goods and services tax to GDP, and the income tax, profit tax, capital gains tax to GDP, with a more pronounced effect on goods and services tax. Increased tax revenue contributes to a higher proportion of total government revenue derived from taxes. In summary, Chinese aid endeavors to bolster the self-development capabilities of aid recipients, foster the development of their national tax capacity, and foster a positive cycle of aid. These findings elucidate the benefits of Chinese aid in advancing global development through the lens of national capacity and offer empirical insights for devising more effective international aid frameworks.