Tax Revenue Implications of Devaluations: A Case Study of Bangladesh

Abstract

A small macroeconomics model is used to estimate empirically the real tax revenue implications of devaluation. Overall effect of devaluation on tax revenue id found to be negative, which contrasts with the theoretical presumption that devaluation improves the government revenue position. According to our estimation a 10 percent devaluation lowers equilibrium output by 1.04 percent and overall tax revenue by 4.2 percent. Import is dependent on output in the model. Contractionary output effect, it seems, lowers tax revenue via, among others, its negative effect on import demand, which in turn traditionally generates a very significant part of total tax revenue.