Public Investment, Tax Evasion, and the Welfare Effects of a Tariff Reform

Abstract:     
Contrary to the case considered in literature, the experience of developing countries indicates that the tariff reforms have not been revenue neutral due to the heavy dependence of developing countries on trade taxes and pervasive tax evasion. In contrast to the plausibility of a welfare loss shown by the current literature, when the adverse effect of the loss of tariff revenue on public investment is factored in, the welfare outcomes of tariff reforms of past few decades turn out to be much more pessimistic. The constraints imposed by tariff dependence and tax evasion imply that future tariff reforms in these countries should be undertaken after the strengthening their domestic tax system and augmenting the ability of their governments to fight tax evasion. For countries of sub-Saharan Africa, where such reforms are likely to be concentrated, this would need planning and capacity building over a longer time horizon.

Keywords: Tariff reform, welfare analysis, public investment, tax evasion

JEL Classifications: D61, D62, F13, H26

Accepted Paper Series