Confronting the Issue of the Elasticity of Customs Evasion in Mozambique: An Empirical Study

This study examines empirically the causal relationship between border tax rates and evasion in a representative Sub-Saharan African country, Mozambique. By nature, evasion is not easy to measure. The methodology employed here follows an approach used by Fisman and Wei (2004). The approach aligns and compares (at the product level) bilateral trade flow data between Mozambique and its largest trading partner, South Africa. We find that high tax levels are associated with high levels of underreporting of import values and that tax rates have a strong and positive effect on tax evasion in Mozambique. Results also strongly confirm the presence of fraudulent classification of merchandise into lower taxed product categories. In addition, the estimates permit one to infer overall levels of evasion. On average, for each three units of imports that enter the country officially, slightly more than one unit is smuggled. For more highly taxed products, the evasion rate is higher. Lastly, the estimates permit analysis of the revenue implications of lower trade taxes. The revenue curve is quite flat but remains upward sloping with respect to the tax rate in Mozambique when only evasion is considered.