The Fiscal Cost of Trade Liberalization - HAL-SHS - Sciences de l'Homme et de la Société
Pré-Publication, Document De Travail Année : 2012

The Fiscal Cost of Trade Liberalization

Résumé

Trade taxes are an important source of revenue for developing countries. These revenues have fallen over the past decades as these countries liberalized trade. Many developing countries simultaneously experienced a decrease in their total tax revenues, suggesting trade liberalization may have come at a fiscal cost. Using a novel panel dataset of tax revenues and government expenditures in developing countries for the period 1945-2006 we identify 110 episodes of decreases in tariff revenues and consider whether countries are able to recover those lost revenues through other tax resources. We show that trade taxes fall by close to 4 GDP percentage points on average during those episodes. Less than half of the countries recover the lost tax revenues 5 years after the start of the episode. The picture is similar when we consider government expenditures. We use the intuition that pre-existing tax capacity is needed to levy domestic taxes to explain theoretically why some countries are unable to recover all tax revenues lost from lowering tariffs. We find that the fiscal cost of trade liberalization is a non-linear function of countries' incentives to invest in tax capacity, and that some will be stuck in a low tax capacity trap. Finally we provide some empirical evidence in line with the model's predictions.
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Dates et versions

halshs-00705354 , version 1 (07-06-2012)
halshs-00705354 , version 2 (29-01-2014)

Identifiants

  • HAL Id : halshs-00705354 , version 1

Citer

Julia Cage, Lucie Gadenne. The Fiscal Cost of Trade Liberalization. 2012. ⟨halshs-00705354v1⟩

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