TITLE:
Trade Openness and Tax Revenue Performance in East African Countries
AUTHORS:
Micah Samuel Gaalya, Bbaale Edward, Hisali Eria
KEYWORDS:
Trade Openness, Tax Revenue Performance, EAC Countries
JOURNAL NAME:
Modern Economy,
Vol.8 No.5,
May
16,
2017
ABSTRACT: Despite the well-known gains
from trade, the effects of trade openness are a priori ambiguous. For this
reason it’s important to establish the effects of trade openness on
different sources of government revenue for
any country opening its borders to trade. This
study sought to establish the effects of trade openness on different categories
of taxes. A panel data cointegration technique that uses the Fully Modified
Ordinally Least Squares and Dynamic Ordinally Least Squares were employed. The
data are annual cross country panels of East Africa countries covering the
period 1994-2012. The data were obtained from the IMF’s International Finance
Statistics, the African Development Bank’s African Economic Outlook and the
World Bank’s World Development Indicators. We found that the average tariff
rate used as a measure for trade openness positively influences total tax,
indirect tax and trade tax while the average tariff rate squared is negative,
illustrating a “Laffer effect” for the three tax categories. The relationship
between trade openness and direct taxes is found to be insignificant. The policy implication is that governments of EAC countries should
asymmetrically implement trade openness policies, particularly loweringthe tariff rate
to help in improving tax performance.