Tariff rates, tariff revenue, and tariff reform : some new facts

The ad valorem tariff rateson specific products and the ratio of tariff revenue to import value, the collected rate, are only tenuously related, contend the authors. Using tariff and revenue data (at the tariff code line level of detail) for three developing countries, the authors compare the statutory ad valorem tariff rates (official rates) with the ratio of tariff revenues to import values (collected rates). They document four facts: (1) the collected rate for any given item of the tariff code has almost no relationship to the official rate for that item; (2) the variation of collected rates around the official rate increases as the level of the official rate increases; (3) the collected rates increase much less, on average, than one-for-one with the official rates; and (4) above a certain level, collected rates do not increase at all despite increases in official rates. Collection rates appear to level off at roughly 50 percent. (In Kenya, collected rates are lower for high-tariff than for moderate-tariff items. Assigning lower rates for the high-tariff items would actually increase revenue on those items.) The implications of these findings are twofold for calculating general revenue. The rates are not the critical determinant of revenues. The revenue implications of large rate changes can be offset by modest changes in the system of exemptions, for example. The benefit of eliminating exemptions is primarily transparency. The costs of programs that provide import exemptions for, say, regional promotion, are often hidden in customs statistics. Secondly, if pressures that cause collected rates not to increase one-for-one with tariff rates will continue to be present in any tariff regime, then these must be factored into tariff reform design.