What’s Left to Tax? Partisan Reallocation of Trade Taxation in Less Developed Countries

Date01 September 2017
Published date01 September 2017
Subject MatterArticles
Political Research Quarterly
2017, Vol. 70(3) 495 –508
© 2017 University of Utah
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DOI: 10.1177/1065912917702497
Trade liberalization has important effects on national
leaders’ choices for tax collection. By necessity, nations
must reduce barriers to trade, especially tariffs, taxes,
and quotas, to increase their interaction with the global
economy. Historically, trade taxes were the largest
source of tax revenue in less developed countries
(LDCs), and trade tax revenue has fallen in most LDCs
as a result of this transformation (Baunsgaard and Keen
2010). Figure 1 shows that, over the period 1975–2009,
trade taxes dropped from around 5 percent of gross
domestic product (GDP) in the 1970s to the current
level of around 1 percent of GDP in our sample of thirty-
eight LDCs.1 The resulting revenue loss put immense
fiscal pressures on governments and forced these nations
to reallocate their taxes to maintain preferred levels of
government provisions.
Few studies have paid attention to government
responses to the shifting tax burden in LDCs and their
important distributive consequences (Aizenman and
Jinjarak 2009). This is a conspicuous gap in the literature
because there are compelling theoretical reasons to
believe that LDCs will be more seriously affected by glo-
balizing reforms than are developed nations, and that
their range of policy responses will be narrower (Rudra
2008; Wibbels and Arce 2003). Moreover, the increased
inequality associated with market integration is acute in
LDCs, yet their tax systems are less developed, thereby
heightening concerns over a “race to the bottom” in wel-
fare provisions (Huber and Stephens 2012). Taxation is a
central distributive concern in LDCs, as seen by tax pro-
tests and riots in countries as diverse as Bolivia, Ghana,
Guatemala, and South Africa in recent decades.
Analyzing tax revenue following trade liberalization
in LDCs thus presents an opportunity to assess whether
and how constrained partisan governments are able to
shape revenue policy. In advanced industrial democra-
cies, it is widely accepted that leftist power in govern-
ment significantly influences tax revenue policy during
periods of market integration (Garrett and Mitchell 2001).
Existing studies on the topic in LDCs are few and are
typically limited to Latin America (Hart 2010; Stein and
Caro 2013). Recent literature, however, has shown that
partisan politics matter for government policies and pol-
icy outcomes in LDCs (Doyle 2012; Dutt and Mitra 2005;
Grieco, Gelpi, and Warren 2009; Ha 2015; Ha and Kang
2015). If partisan effects in LDCs are akin to those
702497PRQXXX10.1177/1065912917702497Political Research QuarterlyHa and Rogers
1Claremont Graduate University, CA, USA
Corresponding Author:
Eunyoung Ha, Claremont Graduate University, 170 East Tenth Street,
Claremont, CA 91711, USA.
Email: Eunyoung.Ha@cgu.edu
What’s Left to Tax? Partisan
Reallocation of Trade Taxation
in Less Developed Countries
Eunyoung Ha1 and Melissa Rogers1
Trade liberalization has reduced trade tax revenue in most less developed countries (LDCs). The options to replace
this tax, which has historically been LDCs’ primary source of tax revenue, are limited by competitive pressures in the
global economy. Using time-series error correction models, we assess how partisan politics shaped the reallocation of
taxes in thirty-eight LDCs from 1975 to 2009. We argue that leftist governments have a vested interest in recovering
lost revenue to fund spending that benefits their constituencies but they are highly constrained by the market signaling
effects of increasing taxes. We find that leftist governments retained higher levels of falling tax revenue and offset trade
tax losses with progressive personal income taxes (PITs). Nonetheless, leftist governments appeared reluctant to
increase revenue from corporate income or social security taxes, which impose costs on business. To make up for the
trade revenue loss, leftists instead relied more heavily on regressive consumption taxes, which are the most lucrative
and market-friendly supplements to preferred PIT. Leftist parties in LDCs demonstrate redistributive concerns, but
their tools and the lasting effects of their reforms are limited by strong market constraints.
taxation, globalization, partisanship, developing nations

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