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

• Date: 01 September 2017
• DOI: 10.1177/1065912917702497
• Published date: 01 September 2017
• Subject Matter: Articles

https://doi.org/10.1177/1065912917702497

Political Research Quarterly

2017, Vol. 70(3) 495 –508

© 2017 University of Utah

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DOI: 10.1177/1065912917702497

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Article

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

research-article2017

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

Abstract

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.

Keywords

taxation, globalization, partisanship, developing nations