Do Illicit Financial Flows Hurt Tax Revenues? Evidence from the Developing World
Recent work draws attention to the fragility of domestic tax revenues—a vital resource for the developing world—to illicit financial flows. To cope with two major challenges in the illicit financial flows–tax revenues relationship—related to the mere illicit financial flows measurement and reverse causality—this paper exploits the Financial Action Task Force data using an impact assessment analysis. Estimations reveal a significant tax revenue loss in countries associated with important illicit financial flows with respect to comparable countries without important illicit financial flows. Moreover, this causal effect—estimated as being economically meaningful—is supported by a large robustness section, and in particular remains unchanged when using several “doubly robust” estimators. Lastly, it unveils heterogeneities in the impact of illicit financial flows on tax revenues, related to the type of tax—a significant loss for indirect but not for direct taxes—and the considered environment. Therefore, policies combating illicit financial flows—for example, by developing institutions or a sound financial system, as shown by the estimations—may provide additional tax revenues for the developing world.
| Main Authors: | , , |
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| Format: | Working Paper biblioteca |
| Language: | English |
| Published: |
World Bank, Washington, DC
2021-09
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| Subjects: | TAX REVENUE, ILLICIT FINANCIAL FLOWS, FINANCIAL ACTION TASK FORCE, EVENT ANALYSIS, |
| Online Access: | http://documents.worldbank.org/curated/undefined/920391632411569911/Do-Illicit-Financial-Flows-Hurt-Tax-Revenues-Evidence-from-the-Developing-World http://hdl.handle.net/10986/36308 |
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| Summary: | Recent work draws attention to the
fragility of domestic tax revenues—a vital resource for the
developing world—to illicit financial flows. To cope with
two major challenges in the illicit financial flows–tax
revenues relationship—related to the mere illicit financial
flows measurement and reverse causality—this paper exploits
the Financial Action Task Force data using an impact
assessment analysis. Estimations reveal a significant tax
revenue loss in countries associated with important illicit
financial flows with respect to comparable countries without
important illicit financial flows. Moreover, this causal
effect—estimated as being economically meaningful—is
supported by a large robustness section, and in particular
remains unchanged when using several “doubly robust”
estimators. Lastly, it unveils heterogeneities in the impact
of illicit financial flows on tax revenues, related to the
type of tax—a significant loss for indirect but not for
direct taxes—and the considered environment. Therefore,
policies combating illicit financial flows—for example, by
developing institutions or a sound financial system, as
shown by the estimations—may provide additional tax revenues
for the developing world. |
|---|