Modern Economy

Volume 8, Issue 5 (May 2017)

ISSN Print: 2152-7245   ISSN Online: 2152-7261

Google-based Impact Factor: 0.81  Citations  h5-index & Ranking

Trade Openness and Tax Revenue Performance in East African Countries

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DOI: 10.4236/me.2017.85049    1,165 Downloads   1,966 Views   Citations

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 lowering the tariff rate to help in improving tax performance.

Cite this paper

Gaalya, M. , Edward, B. and Eria, H. (2017) Trade Openness and Tax Revenue Performance in East African Countries. Modern Economy, 8, 690-711. doi: 10.4236/me.2017.85049.

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