Multilateral Trade Liberalization and Trade Tax versus Non-Trade Tax Revenue

This article examines how multilateral trade liberalization (not domestic trade policy liberalization as widely investigated in the relevant literature) influences the extent of tax revenue diversification. The latter is proxied by the ratio of trade tax revenue to non-trade tax revenue. The analysis primarily uses the fixed effects estimator and covers an unbalanced panel comprising 145 countries, over the period 1995-2015. Results show that multilateral trade liberalization increases the extent of tax revenue diversification, i.e., it reduces the ratio of trade tax revenue to non-trade tax revenue. Furthermore, less advanced economies benefit more than relatively advanced countries of the tax revenue diversification impact of multilateral trade liberalization. Additionally, countries that are highly dependent on the agricultural sector (for example, poor countries or low-income countries) experience a higher positive effect of multilateral trade liberalization on tax revenue diversification than countries with a higher share of value added in the non-agriculture sector in total output. These results, therefore, call for further reduction of world trade barriers, in particular through greater cooperation among Members of the World Trade Organization (WTO) to promote multilateral trade liberalization. JEL Classification: F13; F14; H2; H87