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Globalization and Developing Countries - a Shrinking Tax Base ?

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  • Aizenman, Joshua
  • Jinjarak, Yothin

Abstract

This paper evaluates the impact of globalization on the tax bases of countries at varying stages of development. We see globalization as a process that induces countries to embrace greater trade and financial integration, and macro stabilization. This in turn should shift their tax base from “easy to collect†taxes [tariff, seigniorage, etc.] towards “hard to collect†taxes [VAT, income tax, etc.]. We confirm this prediction – the revenue/GDP ratio of the “easy to collect†taxes declined by about 20% in developing countries between the early 1980s and the late 1990s, while the revenue/GDP of the “hard to collect†taxes increased by 9%. The relatively small initial base of “hard to collect†taxes in developing countries implied a net 7% drop in total tax revenue/GDP. Applying panel regressions and controlling for structural factors, we find that trade openness and financial integration have a positive relationship with “hard to collect†taxes, and negative relationship with the “easy to collect†taxes. The effects of globalization in our panel regressions are even larger than the effects of the institutional and political variables combined. Fiscal revenue from financial repression has also decreased, further reinforcing these results. The high income and the middle income countries managed to more than compensate for the revenue decline of the “easy to collect†taxes, increasing the total tax/GDP. In contrast, the upper and low income developing countries experienced sizeable drop in the tax/GDP. We also identify fiscal convergence: the coefficient of variation of tax revenue/GDP measures across countries declined substantially during 1980s - 1990s. The cross country variation declined by about 50% for seigniorage, about 30% for tariff, and about 15% for the “hard to collect†taxes. These results are consistent with the notion that improving the performance of the “hard to collect†taxes is more challenging than reducing the use of “easy to collect†sources of revenue.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt8r12k4xr.

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Date of creation: 01 Jan 2006
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Handle: RePEc:cdl:ucscec:qt8r12k4xr

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Keywords: Globalization; tax base; fiscal convergence; VAT; financial repression; tariff;

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References

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  1. Roger Gordon & Wei Li, 2007. "Puzzling Tax Structures in Devloping Countries: A Comparison of Two Alternative Explanations," NBER Chapters, in: Fiscal Policy and Management in East Asia, NBER-EASE, Volume 16, pages 9-35 National Bureau of Economic Research, Inc.
  2. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-55, June.
  3. Howell H. Zee & Vito Tanzi, 2000. "Tax Policy for Emerging Markets - Developing Countries," IMF Working Papers 00/35, International Monetary Fund.
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  5. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, vol. 66(2), pages 293-312, November.
  6. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57.
  7. M. Shahe Emran & Joseph E. Stiglitz, 2002. "On Selective Indirect Tax Reform in Developing Countries," International Trade 0210003, EconWPA.
  8. Dessy, Sylvain & Pallage, Stéphane, 2001. "Taxes, Inequality and the Size of the Informal Sector," Cahiers de recherche 0112, Université Laval - Département d'économique.
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  10. Joshua Aizenman & Pablo E. Guidotti, 1990. "Capital Controls, Collection Costs, and Domestic Public Debt," NBER Working Papers 3443, National Bureau of Economic Research, Inc.
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  12. Sebastian Edwards, 2007. "Capital Controls, Sudden Stops, and Current Account Reversals," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 73-120 National Bureau of Economic Research, Inc.
  13. Joshua Aizenman & Yothin Jinjarak, 2008. "The collection efficiency of the Value Added Tax: Theory and international evidence," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 17(3), pages 391-410.
  14. Joshua Aizenman, 2004. "Financial Opening and Development: Evidence and Policy Controversies," American Economic Review, American Economic Association, vol. 94(2), pages 65-70, May.
  15. Raymond Fisman & Shang-Jin Wei, 2001. "Tax Rates and Tax Evasion: Evidence from "Missing Imports" in China," NBER Working Papers 8551, National Bureau of Economic Research, Inc.
  16. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  17. Baunsgaard, Thomas & Keen, Michael, 2010. "Tax revenue and (or?) trade liberalization," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 563-577, October.
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  19. Giovannini, Alberto & de Melo, Martha, 1993. "Government Revenue from Financial Repression," American Economic Review, American Economic Association, vol. 83(4), pages 953-63, September.
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