Trade Liberalization, Exchange Rate and Tax Revenue in Iran

Abstract

Trade liberalization has frequently been the centerpiece of an economic development strategy in developing countries. Trade liberalization often entails a reduction and unification of tariffs and relaxation of quantitative barriers, and may be accompanied or supported by currency devaluation and domestic tax reform. On devising a program of liberalization, policymakers are often hindered in forecasting tax revenues because of the uncertainty regarding the effects of trade liberalization and exchange rate changes on fiscal outcomes. The relationship between trade liberalization, the exchange rate, and tax revenue is therefore an issue of great practical importance. This paper examines this relationship in Iran. We perform Pesaran and Shin method to test this relationship over 1976–2006. These results support the notion that trade liberalization accompanied by appropriate macroeconomic policies can be undertaken in a way that preserves overall revenue yield. At the end appropriate strategies are suggested.