Modern Economy, 2017, 8, 690-711 http://www.scirp.org/journal/me ISSN Online: 2152-7261 ISSN Print: 2152-7245 DOI: 10.4236/me.2017.85049 May 16, 2017 Trade Openness and Tax Revenue Performance in East African Countries Micah Samuel Gaalya 1 , Bbaale Edward 2 , Hisali Eria 2 1 Commissioner General’s Office, Uganda Revenue Authority, Kampala, Uganda 2 College of Business and Management Science, Makerere University, Kampala, Uganda Abstract Despite the well-known gains from trade, the effects of trade openness are a priori ambiguous. For this reason it’s important to establish the effects of trade openness on different sources of government revenue for any country opening its borders to trade. This study sought to establish the effects of trade openness on different categories of taxes. A panel data cointegration technique that uses the Fully Modified Ordinally Least Squares and Dyna- mic Ordinally Least Squares were employed. The data are annual cross country panels of East Africa countries covering the period 1994-2012. The data were obtained from the IMF’s International Finance Statistics, the African Development Bank’s African Economic Outlook and the World Bank’s World Development Indicators. We found that the average tariff rate used as a measure for trade openness positively influences total tax, indirect tax and trade tax while the average tariff rate squared is negative, illustrating a “Laffer effect” for the three tax categories. The relationship between trade openness and direct taxes is found to be insignificant. The policy implica- tion is that governments of EAC countries should asymmetrically imple- ment trade openness policies, particularly lowering the tariff rate to help in improving tax performance. Keywords Trade Openness, Tax Revenue Performance, EAC Countries 1. Introduction The latter part of the twentieth century has been associated with substantial ex- pansion in trade flows, capital movements as well as mobility of labour across borders. During the period world trade in goods and services has grown dra- matically from about US $6.199 trillion in 1994 to approximately US $26.02 tril- How to cite this paper: Gaalya, M.S., Ed- ward, B. and Eria, H. (2017) Trade Open- ness and Tax Revenue Performance in East African Countries. Modern Economy, 8, 690- 711. https://doi.org/10.4236/me.2017.85049 Received: March 12, 2017 Accepted: May 13, 2017 Published: May 16, 2017 Copyright © 2017 by authors and Scientific Research Publishing Inc. This work is licensed under the Creative Commons Attribution International License (CC BY 4.0). http://creativecommons.org/licenses/by/4.0/ Open Access