The effect of trade liberalization on taxation and government revenue

This thesis investigates the trade and revenue impact of trade liberalization. The purpose is to address the following issues: to examine the effect of trade liberalization on the volume of imports and exports, taxation, and its association with the enhancement of the performance of overall tax system. An empirical analysis is conducted by, first, adding liberalization factors to the import and export demand functions to assess their impact on imports and exports. The results indicate that, for Thailand, trade liberalization does not lead to the deterioration in the trade balance. Instead, it helps improve export performance. However, trade deficit may still occur due to a high income elasticity of demand for imports, rooted from its import structure. Although trade liberalization is not found to be associated with the problem of trade imbalance, the fiscal imbalance may still persist due to the mechanism of tariff reduction. In order to deal with the fiscal problem, the government needs to implement domestic tax reform. The consequence of reform may vary since liberalization impacts on taxation differ greatly depending on various factors. The study examines its effect on taxation, by applying a tax effort model and employing a two-way fixed effect approach. The results suggest that tax reform in less developed and developing countries, by moving away from trade tax to domestic taxes, may be inapplicable since domestic taxes may also severely suffer from liberalization. However, tax reform is still necessary and thus the study applies the concept of tax buoyancy and elasticity to evaluate the ability of Thailand’s tax system to mobilize its revenue after the reform. The results reveal that the tax system as a whole is buoyant and elastic due to the high tax-to-base buoyancy of corporate income tax, especially in the post-AFTA period. The main findings from empirical studies have important policy implications for tax strategies of Thailand and other developing countries