Tax Revenue, Income Groups and Growth in Africa

Amid aid cuts, developing countries’ public finance needs are constant and growing. Tax-to-GDP ratios exhibit a positive correlation with GDP per capita globally, suggesting that economic growth in developing countries could enhance domestic revenue mobilization (DRM) and reduce aid dependence over time. Yet there is little evidence to support this in the existing literature. World Bank income status upgrades represent economic growth milestones that may signal future aid reductions, potentially incentivizing governments to increase tax collection. Using synthetic control methods and synthetic difference-in-differences on panel data from the UNU-WIDER Government Revenue Dataset and World Development Indicators (1980-2022), this study examines whether such upgrades result in tax and government revenue increases as a share of GDP in sub-Saharan Africa (SSA). Results reveal that income status upgrades rarely have significant positive impacts on fiscal outcomes. By contrast, extensive robustness checks, including event-study difference-in-differences analyses, show upgrades to lower-middle or upper-middle-income status to be associated with a decline in public revenue per GDP. These findings imply that upgrades cannot be expected to meaningfully enhance DRM in SSA.