The revenue implications of trade liberalization in Tanzania

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University of Dar es Salaam
This study examines the argument that trade liberalization depresses the import duty revenue, and consequently adversely affects the total tax revenue since import duty revenue constitutes a large share of government revenue in Tanzania during the 1979/80-2009/10 period. The study is thought to be significant because Tanzania experiences difficulty in replacing import duty revenues loss as a consequence of trade reform by strengthening its consumption tax system. In the course of analysis, cointegration analysis and error correction modelling are employed. The empirical results show that import duty revenue-to-GDP ratio is positively related to tariff rates, implying that a reduction in the tariff rates may result in a significant loss of import duty revenue. The results also show that the removal of protectionist policies led to an increase in import-to-GDP ratio which in turn led to rising shares of import duty revenue in GDP. Furthermore, the study applies the Fisman and Wei (2004) approach to quantify the impact of tariff rates on the tariff evasion by examining the relationship between the tariff schedule and the tariff evasion. The results indicate that the tariff evasion is positively correlated with tax rates, implying that any increase in tax rate is likely to produce a reduction rather than an increase in tax revenue mainly due to under-invoicing of imports. Finally, the results generate some policy implications. The proper issue in tax design under trade liberalization, Tanzania needs to strengthen the domestic tax system and raise tax revenue without increasing tax rates by reinforcing tax and customs administrations, reducing tax exemptions and tax evasion so as to maintain fiscal stability.
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Free trade, Revenue, Tanzania
Epaphra, M.(2012 The revenue implications of trade liberalization in Tanzania. Master dissertation, University of Dar es Salaam, Available at (