The tax effort in jordan: Does foreign aid reduce tax revenue

The primary objectives of any tax system is to fund public spending programs, redistribute income, and to improve the allocation of economic resources. Relative to advanced economies, it is known that most developing countries have low tax effort (total tax revenue to GDP ratio). It is also reported that many of these countries (developing) are aid-dependent. This is why, the literature has paid a lot attention to the impact of foreign aid on tax effort. Within this context, it is also argued that trust in the government is a significant determinant factor of tax compliance, and hence tax effort. This dissertation examines the issue of fiscal mobilization in Jordan. In more specific terms, the major aim of the dissertation is to empirically examine the impact of aid (and other factors) on tax revenue in Jordan. This interest is due to the fact that the tax effort in Jordan remains relatively low (around 15 percent of the GDP), and the economy, for so long, has been receiving huge amounts of foreign and Arab aid. In addition, this dissertation examines the determinants of trust in the Jordanian government. Based on the time period 1983-2016, and using some relevant time-series econometric techniques, the results indicate that the impact of aid on tax revenue is negative. Jordan suffers from what is called the 'curse of aid'. In addition, the empirical analysis (logit estimation) shows that satisfaction with public schools and public health service increases the probability of a person trusting the government. Based on these results, it is argued that the Jordanian government, together with the donors, must agree on conditioning grants as a way to avoid the curse of aid. Keywords: Tax effort; budget deficit; aid; trust in government; public goods and services.