Trade Tax Evasion and the Tax Rate: Evidence from Transaction-level Trade Data

Abstract

This paper explores the relationship between tax rates and tax evasion in a low-income country context: Ethiopia. By using transaction-level administrative trade data, we are able to provide an analysis that is largely comparable with the rest of the literature while also introducing two important innovations. First, we compare the elasticity of evasion to statutory tax rates and effective tax rates (ETRs). Most studies in the literature so far focused on the former. We show that ETRs are the most relevant parameter to explain evasion in contexts where exemptions are widespread, which results in a large divergence between ETRs and the statutory rates set out in the law. Second, we account for trade costs more precisely than the previous literature by adjusting the trade gap rather than controlling for proxies. We argue that this new approach to accounting for trade costs is superior to those previously adopted in the literature.

Explaining Customs Tax Evasion in Ethiopia: The Effect of Trade Tax, Law Enforcement, and Product Characteristics

“…The literature considers such a systematic negative association between tariffs on similar products and evasion as evidence of deliberate misclassification of imports. Perhaps, aside from capturing “complete smuggling” cases, entirely missing imports are also apprehended as evidence of deliberate misclassification of goods by the importers (Mengistu et al, 2022). The tax statistics demonstrate that the mean tax rate for entirely missing imports is considerably lower than the tax rate for matched items, indicating that high tariff products may be mislabeled as lower tariff goods.…”

“…Besides smuggling, the other potential reason for completely missing imports is differences in how countries classify products. In the case of measurement errors, such honest misclassification of products should not be systematically related to tax rates (Mengistu et al, 2022). More importantly, if the missing imports are due to the trader’s deliberate misclassification of products from high to low tariff categories, such misclassification should be associated with the tax rates.…”

“…Theoretically, customs tax evasion is primarily associated with the prevalence of trade barriers at the border, notably higher import tax rates (Bensassi et al, 2019; Fisman & Wei, 2004; Mengistu et al, 2022). In particular, to reduce the tax burden stemming from higher customs duties and tax rates, traders resort to informal cross-border trade (ICBT; Mitaritonna et al, 2017) and evade border taxes through undervaluation, smuggling, and product misclassification.…”

“…Though there are different forms of evasion (for instance, evasion at customs entry and evasion outside official customs checkpoints), previous studies mainly focused on analyzing one form of smuggling or evasion. Most studies examined evasion practiced at customs entry using mirror statistics (Fisman & Wei, 2004; Javorcik & Narciso, 2008; Levin & Widell, 2014; Mengistu et al, 2022). However, other studies examined tax evasion for goods bypassing official border checkpoints using small-scale survey data collected over a short period (Bensassi et al, 2019; Mitaritonna et al, 2017).…”

Tax evasion, psychological egoism, and revenue collection performance: Evidence from Amhara region, Ethiopia

“…The study investigated the factors influencing tax evasion in Nigeria, and the results showed that the government and law enforcement were not doing their job properly ( Modugu and Anyaduba, 2014 ). Meanwhile, in Ethiopia, taxpayers evade their taxable income by supporting fictitious documents, overstating their expenditures, and not using reliable invoices ( Gashaw and Ayalsew, 2019 ; Manaye et al, 2020 ; Mengistu et al, 2022 ). The above research result assured that in Ethiopia, tax evasion is also a critical problem and needs special attention.…”