Tax revenue implications of trade liberalization in low-income countries

Liberalizing trade has proven highly challenging for some low-income countries, as a large share of their tax extraction derives from trade taxation. After significant drops in tariff levels over the last 30 years, the recovery of lost revenues by other sources of taxation has been highly uneven among these countries. This study demonstrates that recovery has been significantly stronger in countries that have simultaneously initiated a process of democratization. An analysis of 35 low-income countries between 1975 and 2006 is presented. For each dollar lost in trade taxation, democratizing countries have been able to regain approximately 45 cents from other sources in the long run; however autocratic countries show no sign of recouping tax losses.