Effect of Tax Structure Reform on Public Debt in Developing Countries

Abstract

To reduce their public revenue dependence on international trade tax revenue, policymakers in developing countries have engaged (with the assistance of international financial institutions and bilateral donors) in the reform of their tax revenue structure, with a view to reducing their public revenue dependence on international trade tax revenue. This reform (referred to as tax reform) is particularly important given the ongoing unavoidable trade liberalization that sooner or later further erode international trade revenue. Using an unbalanced panel dataset of 127 countries over the period 1980–2019, and the two-step system generalized method of moments, the present article investigates the public debt effect of this tax reform. The empirical analysis has shown that a greater extent of tax reform helps to reduce public debt, with the magnitude of this negative effect being larger in countries with a high share of non-resource tax revenue in public revenue. In addition, the public debt reduction effect of tax reform is larger, the greater is countries’ share of international trade tax revenue in non-resource tax revenue. This analysis has important policy implications. (JEL codes: H63, H10, and H20)