Tariffs, Revenues, Development and EPAs

1
Tariffs, Revenues, Development and EPAs

• Paul Brenton
• Trade Department
• World Bank

2
Sequencing tariff reductions

• The trade opening or market access part of
  these agreements is not at their forefront it
  comes at the end, after regional integration has
  kick started growth, after long transition
  periods, after Europe has invested aid and
  support in these least developing countries
  capacity to trade

3
Plan

• Tariffs, revenues and development
• The revenue impact of tariff reform
• The challenge is to reach a level of development
  where it is feasible to shift to other harder to
  collect taxes
• The key revenue generating tariffs are typically
  not high
• Tariffs, protection and growth
• High tariffs for protection can create an
  anti-export bias and constrain investment and
  growth
• Always superior to proceed with MFN tariff
  reductions

4
Tariff revenues and development

• Two key realities
• Tariffs are an inferior mechanism for raising
  revenues compared to less distortive consumption
  taxes
• Low income countries face greater difficulties in
  implementing broad based consumption taxes as an
  alternative source of revenue to tariffs

5
Low income countries are more dependent on
revenues from tariffs
6
The impact of tariff reductions on revenues will
be limited if

• Imports increase and there are other taxes
  applied to goods (excises,VAT)
• Tariffs on luxury items (cars, cigarettes,
  alcoholic drinks) can be replaced by higher
  excise duties
• Widespread exemptions are removed
• Lower tariffs lead to less smuggling and more
  efficient customs collection
• Lost revenues can be replaced by higher rates, a
  broader base and/or more efficient collection of
  other taxes (excises, VAT, income taxes)

7
Lower tariffs and higher trade revenues an
example from Mauritius (a)
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Lower tariffs and higher trade revenues an
example from Mauritius (b)
9
Lower tariffs and higher trade revenues an
example from Mauritius (c)
10
Lower tariffs and higher trade revenues an
example from Mauritius
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But least developed countries find it difficult
to recover revenues lost from tariff reductions

• High- income countries recover revenues lost from
  trade liberalisation from other sources
• On average, middle income countries recover
  45-60 of lost tariff revenues
• Least developed countries recover less than 30
  of lost tariff revenues
• having a VAT does not guarantee revenue recovery
• LDCs have a small initial base for the hard to
  collect taxes and poor collection efficiency

Source Baunsgaard and Keen (2005)
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Limiting revenue lossesincreasing the tax base
and efficiency of revenue collection

• Increasing the tax base for difficult to collect
  taxes
• Simplification fewer rates, less exemptions,
• economic growth,
• increase size of formal relative to informal
  sector.
• Improving revenue collection
• customs reform embedded in a trade facilitation
  strategy can increase efficiency of collection
  and stimulate higher imports and exports
• Broader administrative reform of tax authority
  improved compliance

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Development and the collection efficiency of VAT
Source Aizenman and Jinjarak (2005)
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Estimated Revenue Losses from an EPA
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revenues from tariffs are often generated by a
few lines
Note cumulative estimated revenue, calculated
using UN TRAINS. Excludes revenue from
excisables
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replacing tariffs with excises would
substantially reduce revenue impact for some
countries
Share of trade revenues from tariffs on excisables
And moving to similar bands for excise rates
would reduce scope for smuggling
Excisables are HS 2203-2208, 2402/03, 2710, 8703,
and 8711.
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Issues in estimating revenue impacts (1) Data

• Need actual revenues not estimates based on
  statutory rates
• Tariff exemptions are often significant
• Customs modernisation/computerisation
• Need to capture impact on other taxes applied at
  the border (VAT, excises)
• Need to take account of impact on domestic
  sources of revenue
• Need accurate trade data

18
Issues in estimating revenue impacts (2)
Methodology

• Which tariffs are removed and when?
• Structure of model
• Demand response and size of substitution effect?
• Growth

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Revenue impactsissues for an EPA

• How to proceed with EPA with countries at
  different levels of development?
• Different timing of tariff reductions not
  feasible in CU
• If a development target is set for reciprocal
  tariff reduction, then pace set by least
  developed country
• Could be addressed through revenue compensation
  for lower income countries but who pays, how
  much, for how long???
• technical assistance to support improved tax
  administration
• If variable geometry how to ensure that regional
  integration is not undermined?
• If tariff revenue losses can be absorbed or
  compensated then why not proceed with MFN ?

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Tariffs, protection and growth

• Tariffs are also a trade policy instrument to
  protect domestic output
• But high tariffs distort incentives, create a
  bias against exports and may constrain growth
• Protective tariffs often raise little revenue
• The main revenue raising tariffs are often low

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high tariffs often generate little revenues, but
there are exceptions
Top 10 Revenue Generators
20 Highest Tariffs
Excisables are HS 2203-2208, 2402/03, 2710, 8703,
and 8711. Top Revenue are the 10 HS6-lines that
collect the largest estimated revenue, excluding
exsisables.20 Highest are the 20 HS6-lines
with the highest average tariff.
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Tariffs, protection and growth

• Examine tariff structures and assess scope for
  growth supporting reform
• Join the ITA
• Bind tariffs close to applied levels
• Reduce tariff peaks and escalation
• Effective regional integration
• Minimise exclusions
• Open regionalism to promote global
  competitiveness(short half-life for preferences)
• Simple non-restrictive rules of origin

23
Tariffs and EPAs

• Preferential tariff reduction can be welfare
  reducing
• Sequencing regional integration with MFN
  reductions then preferences for EU?
• Define a maximum margin of preference?
• Interpretation of substantially all trade and
  which products to exclude

24
Coordination of tariff strategy under EPA maybe
difficult
25
but protection at industry level seems more
similar than at tariff line level
Note simple averages calculated from 8-digit
codes, data for Kenya(2004), Madagascar(2005),
Malawi(2003), and Zimbabwe(2002) obtained from
WTO IDB
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Conclusions (revenue impacts)

• Growth is a necessary condition for ACP countries
  to be able to adjust to the impact of removing
  key revenue generating tariffs
• Tariff reform can contribute to growth
• Nevertheless, reducing key revenue generating
  tariffs will be difficult.
• How can EPAs leverage growth to achieve targets
  after which tariff reductions are implemented?

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Conclusions (protection impacts)

• Difficulty of coordinating which tariffs to offer
  preferences for EU
• Exclusions will be different from a protection
  and a revenue perspective
• Need for open regionalism reduce MFN rates
  before proceeding with preferential access for EU
  (define max pref rate 5?)
• Use EPAs to move away from strategy of protecting
  jobs towards a strategy of growth based on global
  integration and mechanisms for protecting people