Trade Liberalization and Tax Structure in WTO Member Less -Developed and Developing Countries

In this paper, the relationship between trade liberalization (three different indicators) and total tax revenues collected from four tax bases has been examined using a panel data of 32 less -developed and developing countries (members of WTO) during the period 2000-2015. Although many independent variables have already been included in the models to study the effect of the structural features as well as institutional and political constraints on tax revenues, the present study focuses on reviewing the effect of trade liberalization on tax revenues using different trade liberalization indicators. To this end, three indicators "trade openness", "tariff rate" and "trade freedom" have been taken into account as representatives of liberalization and the results obtained show that each of these indicators has had different effects on tax revenues. Based on the results, tax revenues are not so much affected by the increased trade openness (trade share of GDP) and trade freedom (removal of tariff and non-tariff barriers), while the impact of trade liberalization on the tax structure in the form of lower tariff rates is more than the impacts of two other indicators of liberalization. The results also show that an increased liberalization (for each of the three indicators used for trade liberalization) is associated with a shift in tax mixture in developing countries. With an increase in the liberalization level, international trade taxes have been reduced, and domestic taxes (such as taxes on goods and services, corporate income tax, and personal income taxes) have increased.