Project finance loans and taxes

Abstract

Do tax rates increase as countries secure Global Project Finance loans? Over the years, there has been a significant increase in the use of Global Project Finance loans (PF loans) as a source of finance for capital-intensive development projects. Governments invest a considerable amount of time and resources to try and secure PF loans. Later on, more resources are set aside to ensure the project enjoys optimum conditions from its construction to the eventual operation. However, despite this, little is known about whether PF loans alter fiscal decisions of a country. This study investigates whether countries are likely to increase tax rates as they receive PF loans. Considering differences in checks and balance mechanisms as well as economic development in countries, this study further tests how this trend differs across political regimes. Given that PF loans is not a continuous source of revenue, securing PF loans could potentially alter the decisions and policies a leader adopts and at the same time, debt incurred from PF loans could influence future actions of policymakers. This study argues that, countries that receive PF loans are likely to experience a hike in tax rates. But this increase in tax rates varies by the level of economic development and democracy. Using a two-way fixed effects regression model, this study finds that tax rates significantly increase with PF loans. However, this is less likely in countries with high levels of democracy and a higher GDP per capita.