Examining the link between tax revenue mobilization efforts and capital flight in African countries

ABSTRACT

This article examines the impact of tax revenue mobilization on capital flight in 30 African countries, focusing on the role of natural resources. Over the period 1998–2018, econometric analysis based on dynamic generalized method of moments suggests that tax revenue mobilization reduces capital flight in Africa. However, when countries have more natural or oil resources, the negative impact of tax revenues on capital flight weakens. Therefore, despite the importance of the benefits associated with natural resource wealth (in particular, oil wealth), the latter compromises the impact of tax revenue mobilization on stemming capital flight. Finally, greater responsibility in the management of natural resources and more transparent reporting by companies operating in this sector are needed.

KEYWORDS:

• Capital flight; residual method
• natural resources
• tax revenues
• GMM

JEL Classification:

• C23
• E6
• F32

Notes

1 The residual method (World Bank 1985; Morgan Guaranty 1986); the Dooley method (Dooley 1986); the commercial misinvoicing method (Bhagwati 1964); and the hot money method (Cuddington 1986).

2 We were unable to include resources from minerals due to data limitations. We have included forestry resources because they are considered an integral part of World Bank data. However, the IMF also found that, on average, effective taxation in the mining sector was significantly lower than in the oil and gas sectors.

3 Depending on the time horizon of the study, Asongu and Nwachukwu (2016) caution against using more than five control variables as this would lead to biases in the estimated coefficients due to the proliferation of instruments.