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Compensating Lost Revenue in Regional Trade Agreements

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  • Walkenhorst, Peter

Abstract

For countries that have weak domestic tax administrations and rely heavily on trade taxes for government finances, lowering or eliminating tariffs on trade with regional partners can pose a significant fiscal risk. To pursue regional integration despite that risk, provisions on revenue sharing have been added to several RIIs, although not all are operational. Analysis of existing arrangements suggests several desirable design features for RLCAs-among them the use of domestic tax revenues instead of economically more costly trade taxes as the preferred means of raising revenues for compensation. Moreover, simple payout criteria, possibly historically based, facilitate the monitoring and administration of the mechanism. And finally, limited periods of duration and a reduction of compensation payments over time are consistent with the revenue-enhancing effect of trade-induced growth and preserve the incentive for governments to pursue fiscal reforms.

Suggested Citation

  • Walkenhorst, Peter, 2006. "Compensating Lost Revenue in Regional Trade Agreements," MPRA Paper 12279, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:12279
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    File URL: https://mpra.ub.uni-muenchen.de/12279/1/MPRA_paper_12279.pdf
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    References listed on IDEAS

    as
    1. Baunsgaard, Thomas & Keen, Michael, 2010. "Tax revenue and (or?) trade liberalization," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 563-577, October.
    2. Clarete, Ramon L. & Whalley, John, 1987. "Comparing the marginal welfare costs of commodity and trade taxes," Journal of Public Economics, Elsevier, vol. 33(3), pages 357-362, August.
    3. Keen, Michael & Ligthart, Jenny E., 2002. "Coordinating tariff reduction and domestic tax reform," Journal of International Economics, Elsevier, vol. 56(2), pages 489-507, March.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Hazel Parcon, 2008. "Disaggregating PTAs at the Role of International Division of Labor on PTA Formation," Working Papers 200806, University of Hawaii at Manoa, Department of Economics.
    2. Chiumya, Chiza, 2009. "Regional Trade Agreements: An African perspective of Challanges for Customs Policies and Future Strategies," MPRA Paper 17838, University Library of Munich, Germany, revised Aug 2009.
    3. Jean-Jacques Hallaert, 2007. "Can Regional Integration Accelerate Development in Africa? CGE Model Simulations of the Impact of the SADC FTA on the Republic of Madagascar," IMF Working Papers 07/66, International Monetary Fund.

    More about this item

    Keywords

    Regional integration; tariff revenues; compensation mechanisms; tax replacement;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • H27 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other Sources of Revenue

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