Tax Reform and Trade Openness in Developing Countries

Abstract

Developing countries are confronted with the progressive erosion of their trade tax revenue, which then reduces their total tax revenue. In light of the unavoidable process of trade liberalization, such countries have engaged in tax transition reform to change their tax revenue structure in favor of domestic tax revenue. The current analysis uses a measure of tax transition reform (tax reform) to examine whether countries that engage in tax reform experience greater trade openness. The empirical analysis covers 92 developing countries from 1980 to 2014 and shows that tax reform is positively associated with trade openness. Interestingly, least developed countries (LDCs) appear to enjoy a higher effect of tax reform on trade openness than non-LDCs do. This is confirmed by a more general picture that shows how less advanced developing countries enjoy a higher positive effect of tax reform on trade openness than relatively advanced developing countries do.

Heterogeneous Effects of Financial Development on Tax Revenues: Accounting for Institutional Quality in Sub-Saharan Africa

“…Lastly, it shws the recording of non-resource tax revenues is positively affected by financial development. Gnangnon (2019) focusing on the channels of international trade and economic growth for analyse financial development influence on fiscal revenue mobilization effort of 104 developing countries from 1980 to 2014. He concludes that there is a positive relationship between financial development and non-resource tax income mobilization effort.…”

“…As noted befor, institutional quality is our bridging variable. It positively correlated with tax revenue (Aizenman et al, 2019) through its ability to affect the efficiency of tax mobilization and discourage tax evasion, which will result in higher government revenue mobilization (Tanzi and Davoodi, 1997;Ghura, 1998;Torgler, 2003a, b;Torgler et al, 2008;Bird et al, 2008 andYohou andal., 2016, Aizenman andal., 2019). Higher government revenues will, in turn, lead to less debt in financing needed infrastructure or better financing conditions for the economy as a whole.…”

“…It reflects the difference between total taxation revenues without subsidies and payroll taxes (as percentage of GDP) and resource taxation revenues (as percentage of GDP), latest being the tax revenues raised on natural resources. Choice of using non-resource tax revenues as a percentage of GDP as dependent variable rather than the ratio of total tax revenues to GDP is explained by the following factors following Brun and al (2015) and Gnangnon andBrun (2017, 2018) which have pointed out that government financial resources are vastly outside scope of economic policy. Moreover, the use of tax revenues that are not linked to revenue variable allows for increasing consistency across the nations in the set with respect to total fiscal revenues or government revenues.…”

Trade Costs and Tax Structure Reform in Developing Countries

“…Instead, it focuses on the link between trade costs and the structural shift in the tax structure from a reliance on trade tax revenue to a greater dependence on domestic tax revenue. In the literature, this type of tax structure reform is referred to as 'tax transition reform' (e.g., Adandohoin, 2021;Attila et al, 2009;Brun and Chambas, 2014;Chambas, 2005; Gnangnon and Brun, 2019a, 2019b; Gnangnon, 2019Gnangnon, , 2020Gnangnon, , 2021. Such a reform is closed in spirit to the tariff-tax reform, which is revenue enhancing, as ir leaves consumer prices unchanged, but affects the production sector of the economy (e.g., Abe, 1995;Keen and Ligthart, 2002;Kreickemeier and Raimondos-Møller, 2008;Naito, 2006).…”

“…It has postulated that trade costs would affect the extent of tax transition reform directly through the channel of trade openness, and indirectly through the economic growth channel, given that trade openness matters signi cantly for economic growth. To the best of our knowledge, this issue has been largely overlooked in the empirical literature on the macroeconomic determinants of tax transition reform (e.g., Adandohoin, 2021;Attila et al, 2009;Brun, 2019a, 2019b;Gnangnon, 2019Gnangnon, , 2020Gnangnon, , 2021, let alone in the literature of tax reform (in general) in developing countries (e.g., Mahon, 2004;Sánchez, 2006;Di John, 2006;Attila et al, 2009;Lora, 2012;Focanti et al, 2013).…”