Can foreign aid expand fiscal capacity? Drawing on principal–agent theory, I argue that foreign aid builds capacity when the interests of the donor and the political leadership of the recipient state are aligned and when aid administrators in the recipient’s bureaucracy face high-powered incentives to exert effort toward the mission’s goal. Using history as a laboratory, I examine both predictions by studying the impact of the precursor of foreign aid—the Colonial Development & Welfare fund—on tax efforts in 12 British colonies in Africa between 1929 and 1969. Drawing on originally collected data and archival research, I demonstrate that imperial aid boosted colonial taxation because patronage governors were replaced by career officials who shared Lon- don’s agenda for the colonies; and because meeting the fiscal mandate of the program was incentive-compatible with professional advancement of colonial bureaucrats. The analysis offers practical insights about aid efforts to build capacity in sovereign nations.