Trade deregulation and fiscal revenue in selected Pacific Island countries

This paper examines the revenue implications of trade deregulation in a panel of Pacific Island countries from 2010 to 2021. First, we undertake a cross-country analysis of tax revenue, trade, and tax structure. Secondly, we empirically analyze the effect of trade deregulation on trade tax and overall government tax revenue. We find that as the countries have become more deregulated over the decade, the trade tax revenues and direct income tax revenues have declined whereas domestic indirect tax revenues have increased. The empirical estimation reveals the potential Laffer effect for trade tax revenues with respect to trade openness. The effect of regional trade agreements also shows some support for trade tax revenues. Further, the external public debt has a significant positive effect on aggregate tax revenues, while foreign aid has been significant in explaining the decline in both aggregate tax revenues as well as trade tax revenues in the selected Pacific Island countries.