Governance and tax revenue: does foreign aid matter?
| Author | Jun Wen,Umar Farooq,Mosab I. Tabash,Ghaleb A. El Refae,Bilal Haider Subhani |
| DOI | http://doi.org/10.1177/00208523211056071 |
| Published date | 01 March 2023 |
| Date | 01 March 2023 |
| Subject Matter | Articles |
Governance and tax
revenue: does foreign
aid matter?
Jun Wen
School of Economics and Finance, Xi’an Jiaotong University,
China
Umar Farooq
School of Economics and Finance, Xi’an Jiaotong University,
China
Mosab I. Tabash
College of Business, Al Ain University, United Arab Emirates
Ghaleb A. El Refae
College of Business, Al Ain University, United Arab Emirates
Bilal Haider Subhani
School of Economics and Finance, Xi’an Jiaotong University,
China
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
Corresponding author:
Umar Farooq, School of Economics and Finance, Xi’an Jiaotong University, P. R. China.
Email: umerrana246@gmail.com
Article
International
Review of
Administrative
Sciences
International Review of Administrative
Sciences
2023, Vol. 89(1) 273–291
© The Author(s) 2021
Article reuse guidelines:
sagepub.com/journals-permissions
DOI: 10.1177/00208523211056071
journals.sagepub.com/home/ras
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.
Keywords
Asian economies, cointegration analysis, foreign aid, governance, tax revenue
Introduction
The rapid growth of emerging economies is typically devoted to multiple reforms made at
local and country levels. Such economies focus on their local institutional performance
and are keen to invite the other foreign factors that can assist in development
(Adedokun, 2017). Such efforts for instant growth are enacted with sufficient generation
of funds that allow enough room to be created for development projects. Among the other
factors, the better governance situation helps a country to encircle the maximum individ-
ual into tax boundary (Arif and Rawat, 2018). The quality of governance permeates the
better taxation system as it reduces the tax evasion practices and induces the multiple tax
collection reforms. However, governance situation is itself multifaceted factors influ-
enced by several other factors. A prominent factor that influences the local governance
situation is an inflow of voluminous foreign aid because it restricts the institutional pro-
ceedings and hampers their sovereignty (Asongu and Nnanna, 2019). The recipient
country must face trade-off between governance and foreign aid. It channels the low gov-
ernance and thus reduces collection of tax revenue. Following these theoretical interpre-
tations, the current study is concerned with exploring the role of governance and foreign
aid in determining the tax revenue of a country. It further articulates the governance miti-
gation owing to excessive foreign aid that eventually leads to low tax revenue.
It is necessary for developing economies to balance their national expenditures with their
revenue collection. However, such economies mostly suffer from revenue deficits owing to
the burden of local development and non-development projects that need an excessive
amount of funds. In this situation, such economies necessarily have to depend upon
foreign support and look for inflow of foreign funds that can aid their operational activities.
The donor agencies restrict the recipient country to enhance its taxation rate in order to ensure
its funds re-collection (Hisali and Ssentamu, 2013). This restrictive factor imposed by donor
agencies can endure its effects in the form of further collection of funds through high taxation
to some extent. But it deploys the local governance situation through integration with admin-
istrative strategies of the host country. It hoists control of donor agency over institutional pro-
ceedings that further channel the other economic complexities including less collection of tax.
274 International Review of Administrative Sciences 89(1)
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