Abstract
This paper investigates second wave tax transition (transfer of tax pressure from border taxation towards domestic taxation) concerns in developing countries. It essentially focuses on the compensation effects of incomes and property taxes over international trade tax revenue losses in developing countries. Using a generalized method of moment estimator, we come to the evidence that, incomes and property taxes are poor instruments to balance trade tax revenue losses of trade liberalization in these countries. However, a mediating effect of financial development in the compensation nexus driven by corporate income taxes was found. We explain this result by the fact that the use of financial sector generates paper trails to government in order to enforce and raise corporate income taxes. Financial development may progressively crowd-out informal sector and leads to business formalization. Surprising, we do not find any mediating effect of financial development in the compensation patterns with personal income taxes. Nevertheless, some heterogeneities were discovered. Financial development mediates the compensation patterns of personal income taxes in Latin American countries, while the effect holds on corporate income taxes in African countries. We conclude the paper by highlighting the important role of financial development in second generation tax transition concerns over developing countries.
Highlights
Improving domestic resource mobilization is an essential concern of the policy framework that need developing countries in order to face important challenges of economic globalization
We do not find any compensation effect that takes place because of a more pronounced decline in TTR. This result confirms the fact that direct taxes revenue mobilization in developing countries are still limited to accommodate for any shock in trade taxes (TT) revenue and are not yet serving as valuable tax transition instruments in developing countries
The effect is driven by corporate income taxes (CIT)
Summary
Improving domestic resource mobilization is an essential concern of the policy framework that need developing countries in order to face important challenges of economic globalization. The corollary of the trade liberalization policy framework implemented in developing countries in adherence to the World Bank and World Trade Organization policies guidelines is that, countries must promote trade, but alternatively find other tools of revenue mobilization to offset government revenue losses long dominated by international trade taxes. Direct taxes revenue mobilization features come to prominence in the public debate especially with the increased awareness of their relatively low amounts in total revenue collection. Despite property taxation is less subject to tax base competition, their lack of interest lies in the greater government administrative costs that make property tax a losing proposition in terms of revenue yields per expenditure of administrative costs (Bahl & Martinez-Vazquez, [8])
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