Foreign aid and tax revenue in Uganda

This paper analyzes the tax revenue-aid relationship in Uganda using a framework in which fiscal targets and actual outturns differ. The results suggest that grants have a negative association with tax revenue but are offset by the positive association of loans to result in some modest increases in tax revenue in the long run. The coefficient on the per capita income variable suggests that the tax system is inelastic. The error correction model results capture, in a dynamic setting, the offsetting effects of per capita income on the one hand and aid on the other to result in stagnant tax revenue GDP ratio that has been observed in the recent past. Policies that reduce mutation of taxpayers and noncompliance will reduce the country's reliance on aid and its unwanted effects.

► This study sought to relate tax revenue and foreign aid. ► Aid is positively associated with tax revenue in the long run. ► This impact is not seen in the short-run. ► The results highlight the need to strengthen tax administration.