Tax revenue effort and aid in fragile states: The case of Comoros

Abstract

This paper assesses the impact of aid on tax revenue effort in the context of a fragile state, focusing on Comoros. The paper estimates a fiscal response model within a cointegrated vector autoregressive framework with annual data for Comoros's post‐independence period (1984–2017). Results suggest that grants and tax revenue had a significant negative relationship in the long run that remained stable throughout the sample period. Grants are a politically less costly source of finance, reducing the urgency of fragile states' fiscal planners to expend their reduced political capital and administrative capacity on tax collection reforms. This effect may be amplified by the large one‐off budget support grants received from bilateral partners, which often have stopped tax reform initiatives. From the Comorian government's perspective, being aware of this negative relationship is an important step to ensure that long‐term priorities in tax capacity building are not undermined by short‐term objectives in guaranteeing political stability. Furthermore, multilateral official development partners could attempt to compensate for the negative effect of unconditional aid by engaging additional resources for tax capacity building projects and budget support programmes that include sound tax‐related reforms.