Tax Reform and Trade Openness in Developing Countries

Developing countries are confronted with the progressive erosion of their trade tax revenue, which then reduces their total tax revenue. In light of the unavoidable process of trade liberalization, such countries have engaged in tax transition reform to change their tax revenue structure in favor of domestic tax revenue. The current analysis uses a measure of tax transition reform (tax reform) to examine whether countries that engage in tax reform experience greater trade openness. The empirical analysis covers 92 developing countries from 1980 to 2014 and shows that tax reform is positively associated with trade openness. Interestingly, least developed countries (LDCs) appear to enjoy a higher effect of tax reform on trade openness than non-LDCs do. This is confirmed by a more general picture that shows how less advanced developing countries enjoy a higher positive effect of tax reform on trade openness than relatively advanced developing countries do.