DP12469 | Tax Revenues, Development, and the Fiscal Cost of Trade Liberalization, 1792-2006

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This paper examines the impact of trade liberalizations on government revenues. Using a new dataset on tax revenues for 130 countries between 1792 and 2006 we find that on average countries were able to recover the tax revenues lost by liberalizing trade by using other sources of revenue. There are however important differences between the experiences of developing countries and that of today's rich countries when they were at a similar state of development. Trade liberalization led to a larger decline in tax revenues in developing countries since 1970 than in rich countries in the 19th and early 20th centuries. Over 40% of the developing countries in our sample experience a fall in total tax revenues that lasts more than ten years after an episode of trade liberalization. Results are similar when we consider government expenditures, suggesting decreases in trade tax revenues negatively affect governments' capacity to provide public services in many developing countries.