This paper provides an empirical analysis of how the frequency and severity of terrorism affect government revenue and expenditure during the period 1970–2013 using a panel dataset on 153 countries. We find that terrorism has only a marginal negative effect on tax revenue performance, after controlling for economic and institutional factors. This effect is also not robust to alternative specifications and empirical strategies. On the other hand, we find strong evidence that terrorism is associated with an increase in military spending as a percent of GDP (and a share of total government expenditure). Our estimations reveal that this impact is greater when terrorist attacks are frequent and result in a large number of fatalities. Empirical findings also support the view that public finances in developing and low-income countries are more vulnerable to terrorism than those in countries that are richer and diversified.
for the residuals and the Hansen J -test for overidentifying restrictions. In all the regressions, the p -values of the Arellano-Bond (AR) autocorrelation test and the Hansen J -test results confirm the absence of second-order serial correlation in the residuals and the validity of internal instruments.
Table 1 presents our estimation results for the determinants of tax revenue as a share of GDP for the period 1970–2013, with the terrorismterm defined as the number of terrorist attacks or fatalities scaled by population. Our results are broadly in line with