Tax Transition Impact on Fiscal Balance in WAEMU Countries: A Difference‐in‐Difference Approach

ABSTRACT West African Economic and Monetary Union (WAEMU) initiated a tax transition program in 2006 to substitute trade taxes with domestic taxes. This paper assesses the impact of this tax reform on WAEMU countries' fiscal balance and total revenues, using difference‐in‐difference methods. The results showed that the tax transition effect on the structural fiscal balance is marginal. Despite the presence of hard‐to‐tax sectors such as the informal and agricultural sectors, the reform has had a positive impact on tax revenues. This effect is permanent and grows stronger over time. To enhance the effectiveness of the program, the paper suggests to modernize tax administrations in WAEMU countries, to develop digital tools for domestic revenue collection and design policies to reduce the size of the informal sector. Furthermore, for the other Regional Economic Communities and African countries, the results show that fiscal transition could be an effective tool to counter the decline in border tax revenues linked to the implementation of the African Continental Free Trade Area.