International Trade and Tax Performance

Abstract

This paper examines a possible effect of de-globalization and growing isolationism on countries' fiscal capacities by studying the relationship between international trade and tax performance. We address the endogeneity between trade and tax performance by instrumenting for trade openness with geographical determinants of bilateral trade through gravity model estimations. We find that trade openness has a positive causal effect on tax revenue as a percentage of GDP.  Additionally, applying stochastic frontier analysis we find that trade openness positively influences tax efficiency. Our results suggest that the current retreat from global trade may have negative implications for countries' fiscal capacities, particularly for emerging markets where trade plays a crucial role in economic development.

Keywords: International Trade, Global Tax, Tax Ratio, Tax Effort, Tax Inefficiency