Trade Openness and Tax Revenue Performance in East African Countries - Modern Economy

ME > Vol.8 No.5, May 2017

Trade Openness and Tax Revenue Performance in East African Countries ()

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Download as PDF (Size: 878KB) PP. 690-711

DOI: 10.4236/me.2017.85049 1,662 Downloads 4,323 Views Citations

Author(s)

Micah Samuel Gaalya¹, Bbaale Edward², Hisali Eria²

Affiliation(s)

¹Commissioner General’s Office, Uganda Revenue Authority, Kampala, Uganda.
²College of Business and Management Science, Makerere University, Kampala, Uganda.

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.

KEYWORDS

Trade Openness, Tax Revenue Performance, EAC Countries

Share and Cite:

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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