Existing evidence suggests that extra grant revenues lead to little improvements in public services in developing countries--but would governments spend tax revenues differently? This paper considers a program that invests in the tax capacity of Brazilian municipalities. Using variations in the timing of program uptake, I find that it raises local tax revenues and that the increase in taxes is used to improve both the quantity and quality of municipal education infrastructure. In contrast, increases in grants over which municipalities have the same discretion as taxes have no impact on any measure of local public infrastructure. These results suggest that the way governments are financed matters: governments spend increases in tax revenues more toward expenditures that benefit citizens than increases in grant revenues.
"Tax Me, but Spend Wisely? Sources of Public Finance and Government Accountability."
American Economic Journal: Applied Economics,
State and Local Taxation, Subsidies, and Revenue
State and Local Government: Health; Education; Welfare; Public Pensions
State and Local Government: Other Expenditure Categories
Analysis of Education
Educational Finance; Financial Aid
Economic Development: Human Resources; Human Development; Income Distribution; Migration
Finance in Urban and Rural Economies