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Tax Rates and Tax Evasion: Evidence from "Missing Imports" in China

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  • Raymond Fisman
  • Shang-Jin Wei

Abstract

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.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 112 (2004)
Issue (Month): 2 (April)
Pages: 471-500

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Handle: RePEc:ucp:jpolec:v:112:y:2004:i:2:p:471-500

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  1. Bernard, J-T. & Weiner, R.J., 1988. "Multinational Corporations, Transfer Prices, And Taxes: Evidence From The U.S. Petroleum Industry," Papers 8822, Laval - Recherche en Energie.
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  7. Kimberly A. Clausing, 1998. "The Impact of Transfer Pricing on Intrafirm Trade," NBER Working Papers 6688, National Bureau of Economic Research, Inc.
  8. Gordon H. Hanson & Robert C. Feenstra, 2000. "Aggregation Bias in the Factor Content of Trade: Evidence from U.S. Manufacturing," American Economic Review, American Economic Association, vol. 90(2), pages 155-160, May.
  9. Edgar L. Feige, 2004. "How Big IS the Irregular Economy?," Macroeconomics 0404005, EconWPA.
  10. Clotfelter, Charles T, 1983. "Tax Evasion and Tax Rates: An Analysis of Individual Returns," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 363-73, August.
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