Trade costs and tax transition reform in developing countries

Abstract

Developing countries are striving to reform their tax revenue structure to reduce its dependence on international trade tax revenue. The present study has investigated the effect of trade costs on this type of tax revenue structure reform (also referred in the present analysis to as ‘Tax transition Reform’—TTR) through the trade openness channel in developing countries. The analysis has used a set of 124 countries over the period from 1996 to 2019 and several econometric estimators. It shows that higher overall trade costs (notably non‐tariff costs) undermine the TTR process, notably in countries that enjoy high degrees of openness to international trade. In other words, countries that wish to pursue their TTR process, while concurrently further opening up their economies to international trade, have to reduce their trade costs.