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Assessing the Fiscal Impact of Trade Liberalization in Laos: A General Equilibrium Approach

Author

Listed:
  • Sithanonxay SUVANNAPHAKDY

    (Laos-Australia Development Learning Facility)

  • Toshihisa TOYODA

    (Center for Social Systems Innovation and GSICS, Kobe University)

Abstract

Trade liberalization entails the transition from trade taxes to domestic taxes. Certain structural characteristics such as narrow tax base and significant proportion of subsistence sectors, however, constrain such transition and hence reducing public revenues in developing countries. This paper contributes to this debate by assessing the impact of trade liberalisation on domestic tax revenue in Laos. We find that Laos has been able to recover revenue loss from tariff reduction through the introduction of value-added tax (VAT). VAT generated LAK 5,510 billion or 30% of tax revenue in 2017, which was about twice higher than the ratio of tariff revenue to tax revenue in 2000. Our simulation results of tariff liberalization using a computable general equilibrium (CGE) model also reveals that further reduction in tariff rate will be associated with lower indirect tax rate. In particular, the 20% tariff reduction will increase private consumption by 1.14%, but will decrease the effective indirect tax rate from 6.2% to 5.2% and reduce tax revenue by 11%. The worsening tax revenue loss reflects the non-optimal indirect tax rate, which needs to be reduced by 11%. The key policy implication is that any policy designed for raising tax revenue should aim at improving tax collection system and broadening tax base rather raising indirect tax rate.

Suggested Citation

  • Sithanonxay SUVANNAPHAKDY & Toshihisa TOYODA, 2019. "Assessing the Fiscal Impact of Trade Liberalization in Laos: A General Equilibrium Approach," GSICS Working Paper Series 34, Graduate School of International Cooperation Studies, Kobe University.
    • Handle: RePEc:kcs:wpaper:34
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    File URL: https://da.lib.kobe-u.ac.jp/da/kernel/81011876/
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    References listed on IDEAS

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    2. Bismillah & Shahnawaz Malik & Muhammad Ramzan Sheikh, 2022. "Trade Liberalization And Fiscal Stance In Selected Developing Countries: A Granger Causality Approach In Var Framework," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 11(2), pages 134-159, June.

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