Tax Rates and Tax Evasion: Evidence from 'Missing Imports' in China
Coauthor(s): Shang-Jin Wei.
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Tax evasion, by its very nature, is difficult to observe. We quantify the
effects of tax rates on tax evasion by examining the relationship in
China between the tariff schedule and the "evasion gap," which we
define as the difference between Hong Kong's reported exports to
China at the product level and China's reported imports from Hong
Kong. Our results imply that a one-percentage-point increase in the
tax rate is associated with a 3 percent increase in evasion. Furthermore,
the evasion gap is negatively correlated with tax rates on closely related
products, suggesting that evasion takes place partly through misclassification
of imports from higher-taxed categories to lower-taxed ones,
in addition to underreporting the value of imports.
Source: Journal of Political Economy
Fisman, Raymond, and Shang-Jin Wei. "Tax Rates and Tax Evasion: Evidence from 'Missing Imports' in China." Journal of Political Economy 112 (2004): 471-96.