Abstract: | Conclusion Tariffs and export taxes may comprise part of a first-best tax package if their cost of collection is lower than alternative means of raising revenue. Using various proxies for relative collection costs, and holding constant standard indices of development, we find evidence of a significant relationship between a country’s usage of trade taxes and the relative cost of raising revenue. This relationship holds for a large sample of developed and developing countries, and when only developing countries are studied. This research suggests that more attention should be paid to the administrative costs of raising revenue, in addition to the usual focus on the allocative effects of taxes and tariffs. Further study of the nature of these costs should prove valuable in understanding the optimal mix of these policy instruments. It would be particularly valuable to have empirical evidence on what characteristics of a country influence the relative collection cost of raising revenue in alternative ways. This would enable researchers to more precisely identify the effect of relative collection costs on observed tax policy, and facilitate the formulation of tax policy by policymakers. |