Trade Liberalization, Exchange Rate Changes, and Tax Revenue in Sub-Saharan Africa

Abstract

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Empirical evidence on the relationship between trade liberalization, exchange rates, and tax revenue is mixed. This paper examines these linkages anew. Using a panel of 22 countries in Sub-Saharan Africa, over 1980-1996, we perform Generalized Method of Moment regressions to test this relationship. We find evidence that the relationship between trade liberalization and tax revenue is sensitive to the measure used to proxy trade liberalization, but that, in general, trade liberalization is not strongly linked to aggregate tax revenue or its components-though with one measure, it is linked to higher income tax revenue. Currency appreciation and higher inflation show some linkage to lower tax revenues or its components. These results show some partial consistency with previous findings, and support the notion that trade liberalization accompanied by appropriate macroeconomic policies can be undertaken in a way that preserves overall revenue yield.

An Analysis of the Tax Revenue Components in Sub-Sahara Africa

“…A higher level of trade openness generates higher total taxes and this effect comes from trade taxes. This finding runs contrary to the suggestions made by Agbeyegbe et al (2004) and Davoodi and Grigorian (2007) who argue that, due to trade liberalization, more trade openness ought to reduce trade tax collection as countries shift away from trade taxes. To liberalize trade, countries are encouraged to reduce quantitative barriers by lowering tariffs.…”

“…On the other hand, other studies subscribe to the idea that, the existence of formal and usually centralized production units and the export-orientation of the industry make the taxation of the mining sector relative easy. Hence a larger mineral sector generates more tax revenue (Bahl, 1971;Chelliah et al, 1975;and Tait et al, 1979;Ghura, 1998;and Agbeyegbe et al, 2004).…”

“…The idea that individual tax revenue sources deserve special attention has only been recognized by Leuthold (1991), Agbeyegbe et al (2004) and Mahdavi (2008), making existing studies on the disaggregated analysis of tax revenue determinants very scant. Leuthold (1991) employs an autoregressive model to investigate the determinants of direct (personal and corporate income taxes) and indirect taxes (trade and domestic sales taxes) using a panel dataset of eight Sub-Sahara Africa countries.…”

“…In this regard, an individual assessment of each tax component would be more insightful. Agbeyegbe et al (2004) carried out a less composite analysis by analysing the effect of trade liberalization on income taxes, taxes on international trade, and goods and services taxes for a broader sample of twenty-two countries in Sub-Sahara Africa. The study added to the literature in positing a larger sample of countries, a longer time period to capture the time-related dynamics and a more disaggregated analysis.…”

Trade openness, tax reform and tax revenue in developing countries

“…To investigate the relationship between trade openness, tax reform and tax revenue, we rely on previous studies concerning the structural determinants of public revenue (e.g., recent studies include Agbeyegbe et al, ; Baunsgaard & Keen, ; Bird et al, ; Crivelli, ; Crivelli & Gupta, ; Gnangnon & Brun, ) and postulate the following dynamic model:where represents the total tax revenue performance of a given country i in a period t . It is measured by the ratio of tax revenue‐to‐GDP.…”