International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Monday, December 24, 2018

What source of money do corrupt officials prefer: revenue form taxes or transfers (e.g. development aid)?

The capacity of Brazilian local governments to source tax revenue has a greater impact on education and on corruption than external transfers.

In developing countries, new sources of government revenue are often channeled into corrupt hands. A study in Brazil explored whether revenues sourced from taxes, as opposed to external transfers, was spent differently.

Tax Me, But Spend Wisely? Sources of Public Finance and Government Accountability American Economic Journal: Applied Economics, 2017, Vol 9 (1).

Online Appendix Data and replication code Working Paper Version Non technical summary (VoxDev)

Existing evidence suggests that extra grant revenues lead to little improvements in public services in developing countries--but would governments spend tax revenues differently? This paper considers a program that invests in the tax capacity of Brazilian municipalities. Using variations in the timing of program uptake, I find that it raises local tax revenues and that the increase in taxes is used to improve both the quantity and quality of municipal education infrastructure. In contrast, increases in grants over which municipalities have the same discretion as taxes have no impact on any measure of local public infrastructure. These results suggest that the way governments are financed matters: governments spend increases in tax revenues more toward expenditures that benefit citizens than increases in grant revenues.

Hat Tip: above provided by Dean Andrew Morriss of Texas A&NM University School of Innovation.

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