Compensating Lost Revenue in Regional Trade Agreements

Walkenhorst, Peter (2006): Compensating Lost Revenue in Regional Trade Agreements.

Abstract

For countries that have weak domestic tax administrations and rely heavily on trade taxes for government finances, lowering or eliminating tariffs on trade with regional partners can pose a significant fiscal risk. To pursue regional integration despite that risk, provisions on revenue sharing have been added to several RIIs, although not all are operational. Analysis of existing arrangements suggests several desirable design features for RLCAs-among them the use of domestic tax revenues instead of economically more costly trade taxes as the preferred means of raising revenues for compensation. Moreover, simple payout criteria, possibly historically based, facilitate the monitoring and administration of the mechanism. And finally, limited periods of duration and a reduction of compensation payments over time are consistent with the revenue-enhancing effect of trade-induced growth and preserve the incentive for governments to pursue fiscal reforms.

• Item Type: MPRA Paper
• Language: English
• Keywords: Regional integration, tariff revenues, compensation mechanisms, tax replacement
• Subjects: F - International Economics > F1 - Trade > F15 - Economic Integration; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H27 - Other Sources of Revenue

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