Tax Transition in the Waemu Zone: Analysis of the Effects on Fiscal Deficit

Abstract

In 2006, the countries of the West African Economic and Monetary Union (WAEMU) initiated a fiscal transition program which consists mainly of replacing the loss of customs revenues, as a result of regional integration and trade opening policies, with domestic taxation. After several years of implementation of this tax reform, this study assesses its effects on the countries’ budget deficits. The study uses a fixed effects panel model. The results of the estimations suggest that the reform has had positive effects on the countries’ fiscal deficits through an improvement in the collection of tax resources. The study found a slight deterioration in the structural fiscal deficits of the countries, linked to an increase in public spending in a context of sovereign debt relief and major economic and security challenges. In addition, the level of financial development and the decline in the size of the informal sector of economies played a significant role in revenue collection and fiscal deficit financing. Finally, the study identified a threshold of 13 percent below which the decline in customs revenues as a result of more open trade policies would negatively affect the level of total tax revenue and, in turn, the fiscal deficit. These results lead to policy recommendations.

Keywords

Domestic taxation doorstep taxation fiscal transition fiscal deficit

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