IDEAS home Printed from https://ideas.repec.org/p/cdl/ucscec/qt8r12k4xr.html

Globalization and Developing Countries - a Shrinking Tax Base ?

Author

Listed:
  • 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.

Suggested Citation

  • Aizenman, Joshua & Jinjarak, Yothin, 2006. "Globalization and Developing Countries - a Shrinking Tax Base ?," Santa Cruz Department of Economics, Working Paper Series qt8r12k4xr, Department of Economics, UC Santa Cruz.
    • Handle: RePEc:cdl:ucscec:qt8r12k4xr
    as

    Download full text from publisher

    File URL: https://www.escholarship.org/uc/item/8r12k4xr.pdf;origin=repeccitec
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Aizenman, Joshua & Guidotti, Pablo E., 1994. "Capital controls, collection costs and domestic public debt," Journal of International Money and Finance, Elsevier, vol. 13(1), pages 41-54, February.
    4. Ruud, Paul A., 2000. "An Introduction to Classical Econometric Theory," OUP Catalogue, Oxford University Press, number 9780195111644.
    5. Garcia Penalosa, Cecilia & Turnovsky, Stephen J., 2005. "Second-best optimal taxation of capital and labor in a developing economy," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 1045-1074, June.
    6. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo.
    7. Tanzi, Vito & Zee, Howell H., 2000. "Tax Policy for Emerging Markets: Developing Countries," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(2), pages 299-322, June.
    8. Sebastian Edwards, 2007. "Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences," NBER Books, National Bureau of Economic Research, Inc, number edwa06-1, September.
    9. Dessy, Sylvain & Pallage, Stephane, 2003. "Taxes, inequality and the size of the informal sector," Journal of Development Economics, Elsevier, vol. 70(1), pages 225-233, February.
    10. Raymond Fisman & Shang-Jin Wei, 2004. "Tax Rates and Tax Evasion: Evidence from "Missing Imports" in China," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 471-500, April.
    11. Dani Rodrik, 1998. "Has Globalization Gone Too Far?," Challenge, Taylor & Francis Journals, vol. 41(2), pages 81-94, March.
    12. 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.
    13. 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, pages 9-35, National Bureau of Economic Research, Inc.
    14. Emran, M. Shahe & Stiglitz, Joseph E., 2005. "On selective indirect tax reform in developing countries," Journal of Public Economics, Elsevier, vol. 89(4), pages 599-623, April.
    15. Carlos A. Végh, 1989. "Government Spending and Inflationary Finance: A Public Finance Approach," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 657-677, September.
    16. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    17. Eric Friedman & Simon Johnson & Daniel Kaufmann & Pablo Zoido-Lobaton, 2007. "Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69 Countries," Palgrave Macmillan Books, in: Erik Berglöf & Gérard Roland (ed.), The Economics of Transition, chapter 9, pages 298-334, Palgrave Macmillan.
    18. Dani Rodrik, 1997. "Trade, Social Insurance, and the Limits to Globalization," NBER Working Papers 5905, National Bureau of Economic Research, Inc.
    19. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
    20. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-555, June.
    21. Giovannini, Alberto & de Melo, Martha, 1993. "Government Revenue from Financial Repression," American Economic Review, American Economic Association, vol. 83(4), pages 953-963, September.
    22. Baunsgaard, Thomas & Keen, Michael, 2010. "Tax revenue and (or?) trade liberalization," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 563-577, October.
    23. Sebastian Edwards, 2007. "Introduction to "Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences"," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences, pages 1-18, National Bureau of Economic Research, Inc.
    24. Joshua Aizenman, 2004. "Financial Opening and Development: Evidence and Policy Controversies," American Economic Review, American Economic Association, vol. 94(2), pages 65-70, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jinjarak, Yothin, 2013. "Economic integration and government revenue from financial repression," Economic Systems, Elsevier, vol. 37(2), pages 271-283.
    2. 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.
    3. Adam, Antonis & Kammas, Pantelis, 2012. "(Tax evasion) power to the people: does "early democratization" increase the size of the informal sector?," MPRA Paper 43343, University Library of Munich, Germany.
    4. Maria Kazakova & Alexandr Knobel & Ilya Sokolov, 2010. "Quality of VAT administration in OECD countries and Russia. Reform of the Russian system of tax collection," Research Paper Series, Gaidar Institute for Economic Policy, issue 134P.
    5. Gordon Roger H., 2010. "Public Finance and Economic Development: Reflections based on Experience in China," Journal of Globalization and Development, De Gruyter, vol. 1(1), pages 1-29, January.
    6. Aizenman, Joshua & Pasricha, Gurnain Kaur, 2013. "Why do emerging markets liberalize capital outflow controls? Fiscal versus net capital flow concerns," Journal of International Money and Finance, Elsevier, vol. 39(C), pages 28-64.
    7. Amin, Mohammad & Islam, Asif, 2015. "Are Large Informal Firms More Productive than the Small Informal Firms? Evidence from Firm-Level Surveys in Africa," World Development, Elsevier, vol. 74(C), pages 374-385.
    8. Arbex, Marcelo & Galvao, Antonio F. & Gomes, Fábio Augusto Reis, 2010. "Heterogeneity in the Returns to Education and Informal Activities," Insper Working Papers wpe_216, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    9. Cage, Julia & Gadenne, Lucie, "undated". "Tax Revenues, Development, and the Fiscal Cost of Trade Liberalization, 1792-2006," Economic Research Papers 269314, University of Warwick - Department of Economics.
    10. James Alm & Jorge Martinez-Vazquez, 2007. "Tax Morale and Tax Evasion in Latin America," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0704, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    11. Alexander Knobel & Sergey Sinelnikov-Murylev & Ilya Sokolov, 2013. "Quality of the Administration of Value-Added Tax in OECD countries and Russia," Working Papers 0050, Gaidar Institute for Economic Policy, revised 2013.
    12. Kodjo Adandohoin, 2021. "Tax transition in developing countries: do value added tax and excises really work?," International Economics and Economic Policy, Springer, vol. 18(2), pages 379-424, May.
    13. Manamba Epaphra, & John Massawe,, 2017. "Corruption, governance and tax revenues in Africa," Business and Economic Horizons (BEH), Prague Development Center, vol. 13(4), pages 439-467, October.
    14. Marcelo Arbex & Dennis O'Dea, 2011. "Informal work networks," Canadian Journal of Economics, Canadian Economics Association, vol. 44(1), pages 247-272, February.
    15. Chen, Jinzhao & Quang, Thérèse, 2014. "The impact of international financial integration on economic growth: New evidence on threshold effects," Economic Modelling, Elsevier, vol. 42(C), pages 475-489.
    16. Jesús J. Rodríguez De Luque, 2014. "Efectos de las políticas tributaria y fiscalizadora sobre el tamano del sector informal en Colombia," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID.
    17. Aureo de Paula & Jose A. Scheinkman, 2006. "The Informal Sector," Levine's Bibliography 122247000000001030, UCLA Department of Economics.
    18. Blagica Petreski & Marjan Petreski, 2022. "Unregistered micro-performers of business activity in North Macedonia: Analysis with recommendations for a policy action," Finance Think Policy Studies 2022-07/43, Finance Think - Economic Research and Policy Institute.
    19. James Boyce, 2007. "Public Finance, Aid and Post-Conflict Recovery," Working Papers wp140, Political Economy Research Institute, University of Massachusetts at Amherst.
    20. Russo Francesco Flaviano, 2018. "Informality: the Doorstep of the Legal System," Open Economics, De Gruyter, vol. 1(1), pages 49-70, June.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cdl:ucscec:qt8r12k4xr. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lisa Schiff (email available below). General contact details of provider: https://edirc.repec.org/data/ecucsus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.