Tax-aid nexus - The case of Sub-Saharan Africa and China

Abstract: This paper empirically discusses the interaction between Chinese Official Development Assistance (ODA) and Sub-Saharan tax revenue 2000-2017. Through the use of the methods OLS and IV, I pose the question whether there is evidence supporting the tax-aid nexus, which suggests a negative impact of increasing foreign aid on tax revenue. Additionally, the research delves into the specific effects of ODA loans compared to ODA grants, as well as the varying impact of sector-specific ODA flows on tax revenue. The findings reveal that an increase in Chinese ODA has a detrimental impact on tax revenue in Sub-Saharan Africa. Moreover, the results suggest that an increase in grants offsets tax revenue, while an increase in loans does not yield a significant effect. Lastly, although no discernible effect can be observed in the economic sector, there is evidence indicating that increased Chinese ODA inflows in the social sector negatively affect tax effort.