TRADE LIBERALIZATION AND TAX STRUCTURE: NEW EVIDENCE FROM ASEAN COUNTRIES45474

Applying estimation FEM, REM, GLS methods for panel, the empirical results show that trade liberalization positively affects taxes on goods and services.. In addition, the trade liberali

TRADE LIBERALIZATION AND TAX STRUCTURE:

NEW EVIDENCE FROM ASEAN COUNTRIES

Xuan-Hang Tran 1 *, Van-Cuong Dang 2 , Minh-Hang Nguyen 1

1University of Finance Marketing

2University of Economics Ho Chi Minh City

ABSTRACT

The purpose of the study examines the impact of trade liberalization on tax structures from ASEAN-6 countries (Cambodia, Indonesia, Malaysia, Philippines, Thailand and Vietnam) for the period 2001 - 2018 Applying estimation FEM, REM, GLS methods for panel, the empirical results show that trade liberalization positively affects taxes on goods and services

In addition, the trade liberalization has a negative impact on taxes on income, profits and capital gain while the effect of the trade liberalization

on taxes on international trade is not clear in the surveyed countries On that basis, the study provides some policy suggestions for tax structure

in Vietnam

Keywords: ASEAN, trade liberalization; tax structure

1 INTRODUCTION

Trade liberalization has become an objective trend, attracting countries, promoting cooperation and increasing competition among economies The trade liberalization impacts countries in in three aspects: (1) restrictions on commercial rights (i.e import and export rights) have been loosed; (2) tariffs have been reduced; and (3) non-tariffs measures have been reduced (Baunsgaard & Keen, 2010) to create an open business environment for entities At the same time, increasing the competitive pressure among economies face to pressure of tariffs reduction and easier trade barriers The total tax revenue will change when the tax revenue from reduction

of import and export activities (Ebrill, Stosky & Gropp, 1999), creating pressure

on government budget or balance trade In addition, some countries set up the business environment rankings which are based on the criteria for applying tax components Evidence from Bellak and Leibrecht research (2009) concludes that tax rates negatively affect the profitability of investment capital

* Corresponding author

Email address: xuanhangufm@gmail.com

Thus, a country with appropriate tax policies will improve production and business efficiency, ensure revenue for the State Budget and safety in the process of global economic integration A good tax structure is essential element for attracting businesses and enhancing economic development However, making the tax policy

is not only a simple matter of a fully sovereign and independent nation, but the globalization have quickly become objective elements that govern the tendency of tax reform which is affected by the international economic relations and participant level in each So, what is the tendency of tax revenue of nations especially ASEAN and the changes of tax structure due to the effects of trade liberalization are concerned

by these nations

Besides, researches about trade liberalization and tax structure are carried out by many authors, with a variety of research objects and data The results of these authors are not yet consistent, so with the appropriate estimation techniques, the paper examines the impact of trade liberalization on the tax structure in the context

of tax competition in ASEAN countries From this research objective, the paper will answer the research question posed as how trade liberalization affects types taxes?

2 LITERATURE REVIEWS

2.1 Trade liberalization and tax structure: In theory and existing empirical studies

Hinrichs (1966) shows that there is no best tax system for all countries or each country during the time Through the development process, the tax system in the countries has also changed significantly One of the most important reasons

is reaching towards a tax system that meets market economy requirements and ensures international competitiveness (Rao, 2000) Lee et al (2008) emphasizes that developing countries have difficulty in expanding the scale of tax collection effectively and fairly This tax scale depends on the ability to collect taxes Therefore, these countries must have a long-term vision and specific strategies because they cannot have “a suitable model for all countries”

The tax structure of a country includes many different taxes, which can be divided into three general categories: taxes on income, profits and capital gain, taxes on goods and services and taxes on international trade Personal income tax and corporate income tax are the main components of taxes income, profits and capital gain which has happened rarely General sales tax and excise tax are the main component of tax on goods and services The sale tax form are established in every nation which have taxes on goods and services or taxes on revenues or taxes on retails With international trade tax is the tax on the goods and services are in the import and export process

Taxes on income, profits and capital gain: although the ASEAN region’s per capita

income is still low (Figure 1), the collection from this tax also contributes about one-third of total tax revenue Over time, most countries have implemented tax policy amendments which create a good environment for businesses and match with international trends The current general trend of the countries shows that reducing corporate income tax to encourage investment and promote growth Trade liberalization take an important role which effects on income through changes in

the flexibility of imported goods and domestic manufacturers replace short-term and long-term imports Based on tax competition and tax harmonization, trade liberalization will reduce the income tax of countries

Taxes on goods and services: many developing countries, including ASEAN

countries, taxes on goods and services (also called indirect taxes) are a significant source of revenue (Ebrill, Keen, Bodin & Summers, 2001) In this tax revenue, there

is a great proportion comes from export and import activities Trade liberalization has increased import value, compensating for this reduction due to tariff changes

In addition, tax revenue may be reduced, due in partly to reducing import volume Actually, the tax collection effects on domestic goods and services is lower than for imported goods However, in the long run, if economic growth increases due to trade liberalization, the tax structure can be expandable The real currency devaluation will lead to an increase in excise taxes and taxes on goods and services from import activities The tax burden on goods and services is mainly transferred to consumers through the price adjustment

Taxes on international trade: taxes on goods which are involved in the export or import

process In the process of trade liberalization, countries participate in international organizations, accept free trade agreements so tariff lines which decrease taxes and affect the tax revenue from import and export activities However, in the long term, such revenues may be offset by the increase in cargo volume

Figure 1 Tax structure of ASEAN from 2001 to 2018 Source author’s own calculation base on WDI

Notes:

- Taxes on goods and services - TGS

- Taxes on income, profits and capital gain - TIPC

- Taxes on international trade - TIT

- Other taxes - OT

In fact, there are many research papers about trade liberalization and tax structure For researchers, trade liberalization has become an initiative important development policy in many countries around the world Trade liberalization is defined as

"eliminating all or a part of trade barriers such as quotas, import taxes and non-tariff barriers imposed by governments on goods on export and import process” (Marchant and Snell, 1997) Despite of trade liberalization implementation, many developing economies and emerging economies still rely on trade taxes as a major source of government revenue Most of studies focused on how to reduce tariffs,

eliminate tax exemptions and increase the tariffs which have low rate in an unified way, but can still increase tax revenues (Ebrill et al., 1999) Specifically, increasing the tax revenue, the researchers consider that tariffs (import-export taxes) should be replaced by domestic consumption taxes (Dixit, 1985; Hatzipanayotou et al, 1994; Keen and Ligthart, 2002) In the contrary, other researchers argue that when trade liberalization reduces import and export taxes as well as trade restrictions which cause a loss of tax revenue However, if trade volume increases, the tax revenue may increase (Tanzi, 1989; Glenday, 2002; Greenaway, Morgan and Wright, 2002, Suliman, 2005)

The author examines empirical studies on the relationship between trade liberalization and tax structure These studies are developed in many different directions Essentially, based on research objectives, it is possible to classify empirical studies into the following main groups:

Some studies focus on analyzing the long-term impact of trade liberalization on the tax structure The impact of trade liberalization will reduce import duties and other trade restrictions, resulting in a reduction in the total tax revenue, but if in the long run, the trade volume will increase the tax revenue (Tanzi , 1989; Glenday, 2002; Greenaway, Morgan and Wright, 2002; Suliman, 2005) Basirat and fortifications (2014) These researcher often use ARDL (Autoregressive Distributed Lag), which examines the long- term relationship between trade liberalization and tax structure, and using models correcting the variance (ECM) according to the ARDL approach

to determine the short - term impact between them The findings of these studies are important references for policy makers to devise appropriate solutions in each specific stage

Grossman & Helpman (1990); Krueger (1998) argues that trade liberalization will increase the long-term growth of an economy and enhance the overall economic development However, according to analysts on trade liberalization, adding evidence

is quite necessary because this makes the assessment become more reliable

Besides, previous researches shows that there are two opposing views Some researchers agree that trade liberalization bring benefits for the economy, but other researcher argue that this process bring the harmful things for economy development From a traditional point of view, researchers uniformly liberalize trade like an economy like Cameron (1978), Leamer (1988), Rodrik (1996), Rodriguez (2000), Andersen and Babula (2008)

In general, researches about trade liberalization and tax structure are carried out

by many authors, with a variety of research objects and data The results of these authors are not yet consistent, so with the appropriate estimation techniques, the paper examines the impact of trade liberalization on the tax structure in the context

of tax competition in ASEAN countries

2.2 TECHNIQUE

2.2.1 Data acquisition

To examine the impact to trade liberalization on tax structure, we choose the ASEAN - 6 countries during the period 2001 - 2018 The description of variables

are presented in Table 1 We extract data from several sources such as World Development Indicators (WDI), The Worldwide Governance Indicators (WGI)

Table 1 Variables description

3 METHODOLOGY

Applying estimation FEM, REM, GLS methods for panel, the empirical results show that trade liberalization positively affects taxes on goods and services In table

2, we present the summary statistics of interested variables Overall, we have 108 observations from 6 countries, the economic approach used follow that of Tosun (2005) by considering to analyze the impact of trade liberalization on the tax structure in ASEAN countries We construct an empirical model applied for panel data as follows:

Where:

is share of jth tax type in total revenue (in percent);

LIB is index of trade liberalization that we use trade openness;

X is a set of time and country varying explanatory variables, and control variables;

is the vector of coefficients to be estimated;

is the error term

Tax share includes:

- Taxes on goods and services - TGS

- Taxes on income, profits and capital gain - TIPC

- Taxes on international trade - TIT

- Other taxes - OT

4 RESULTS AND DISCUSSION

Descriptive statistics provide an overview research dataset from 2001 to 2018 Tax share)*+ = β.+ β0LIB)*+ β4X)*+ ε)*

Tax share)*+ = β.+ β0LIB)*+ β4X)*+ ε)*

According to the results, the trade liberalization of countries base on the terms

of trade openness which reaches an average rate of 118%, the largest percentage

is 220% belonging to Malaysia and the smallest is 37% of Indonesia During that period, tax on income and profit contributed 33.69% of total tax revenue, tax on goods and services accounted for 32.27%, tax for international trade 10.52 %, finally another tax group of 1.9%

Table 3 Pearson correlation matrix

TGS TIPC TIT OT AGR C O R LIB PO P EDU GO V AGR 0.3873* -0.8535* 0.5947* -0.4573*

COR -0.4912* 0.7829* -0.5524* 0.1803* -0.7504*

LIB -0.0181 0.1102 -0.0674 -0.3211* -0.0065 0.4579*

POP -0.7051* 0.0386 0.3049* 0.4657* 0.1675* 0.0486 0.0559

EDU 0.1389 -0.7422* 0.5656* -0.1214 0.7576* -0.6779* -0.2176* 0.3264*

GOV -0.2434* 0.5643* -0.5368* 0.1362 -0.7933* 0.7021* 0.0885 -0.2918* -0.6199*

GDP -0.5195* 0.6510* -0.6946* 0.1008 -0.6731* 0.8709* 0.3480* 0.0547 -0.5345* 0.7294*

Note: *p<0.1; **p<0.05; ***p<0.01.

We produce the Pearson correlation matrix (Table 3) to detect the preliminary relationships between variables Table 3 shows that the sign of explanatory variables

in the model is consistent with expectations and is statistically significant at 1% level

In general, the correlation between variables is low, eliminating the possibility of multicollinearity in regression analyzes (Evans, 1996)

Table 4 shows the regression results of the variables in the model The results show that trade liberalization affects different taxes Trade liberalization has a positive impact on taxes on goods and services This shows that countries are more open

to trade, which helps the flow of import and export goods more and more, so the taxes on goods production increases Trade liberalization negatively affects taxes

on income, profits and capital gain This meaning is also easily explained in the tendency of tax competition, by the process of reducing corporate income tax (CIT)

in ASEAN countries in recent years When these countries are reducing their tax rates there is a risk of a “race to the bottom”

For example, Vietnam will gradually cut tax rates from 22% to 20% in 2016 Malaysia also dropped to 24% in 2016

According to this study, trade liberalization does not affect taxes on international trade This is in line with the author’s interpretation when the decline in tax revenue

is offset by increased commodity output Other taxes include property taxes and royalties, although they contribute a small percentage of the total tax revenue but are also an important source of revenue, especially for countries with budget deficits High as Vietnam, Malaysia, Philippines Tax incentives to attract investment are the leading policies of developing countries today, so the reduction of revenues from these taxes is unavoidable

Table 4 Results of estimate regressions, impact of trade liberalization on tax structure

Wooldridge

Wald test Prob > chi2 = 0.0000 Prob > chi2 = 0.0000 Prob > chi2 = 0.0000 Prob > chi2 = 0.0000

Note: *p<0.1; **p<0.05; ***p<0.0

When testing the defects of the fixed effects model (FEM), it is found that there

is an autocorrelation and heteroscedasticity, so the we dealt with the defect by using regression model by GLS method (Generalized Least Squares) to solve heteroscedasticity and autocorrelation to achieve efficiency for the model

Table 5 Results of GLS regressions

Note: *p<0.1; **p<0.05; ***p<0.01.

In addition to the independent variable, trade liberalization, the control variables also have different effects on tax structure

The share of agriculture (AGR) positively affects taxes on goods and services, taxes on international trade, and other taxes that are negative to income and profit taxes This result can be explained by countries implementing tax policies to promote agricultural development such as:

(i) Continue to exempt agricultural land use tax until after 2020;

(ii) Focusing on CIT incentives for manufacturing machinery, equipment, chains, and input products for the agricultural sector; tax exemption and reduction for income from the agricultural sector of production units;

income from dividends in the agricultural sector

Thus, the policy of tax exemption and reduction for agricultural development will continue to reduce Tax revenue from this sector in the coming time The index of corruption control has a positive impact on income tax and taxes on international trade, which is similar to previous research results that the author references

Kenny and Winer (2006) used population growth (POP) as factors that affect tax structure Their result indicate that population growth has a significantly positive impact on the use of income, profits and capital gain taxes, taxes on international trade Our results support the arguments that population growth has the predicted negative negative impact on income and sales taxes and positive impact on trade taxes, although most of the coefficients are not significant Thus, countries may rely more on hard to collect taxes as population growth increase

The government spending (GOV) impresses the government size It is expected, as the government size becomes larger, more taxes are collected from each tax source But the question is: as the governments get larger whether or not the share taxes drawn from any sources are changed? As Hettich and Winer (1984) and; Kenny and Winer (2006) mentioned, the government size may impact tax mix because change

in the government size may changes the marginal political cost for each tax source Our results indicate that in general, as government expenditure increase international trade taxes and the share of taxes from income decrease

5 CONCLUSIONS

Although many independent variables are included in the model, the discussion focuses on the results concerning the effect of trade liberalization on tax structure using different measures of trade liberalization The research on the impact of trade liberalization on tax structure in ASEAN - 6 countries in the period 2001 - 2018 by the method of REM, FEM and GLS with the following results:

First, trade liberalization positively affects taxes on goods and services, negatively affects taxes on income and profits but does not affect taxes on international trade Secondly, corruption control index contributes positively to increasing income tax and international trade

Based on the research results, the paper suggests some policy implications for the tax structure of ASEAN - 6 countries Tax competition cannot be a long-term solution because of its negative effects and causes an increase in budget deficit Therefore, it is necessary to have a policy of harmonizing taxes, creating conditions for the common market to operate more effectively

Focus on managing and exploiting the current revenue sources more effectively, improving the quality of tax administration, reforming procedures, the process of tax declaration, payment, completion and inspection

ACKNOWLEDGMENT

We are grateful conference participants at the University of Economics and Business-Vietnam National University, Hanoi (UEB-VNU, Hanoi) and the Manning School of

Business, University of Massachusetts Lowell (UMass Lowell); and supported by Fulbright Vietnam for helpful comments

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