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Forensics, Elasticities and Benford's Law

Author

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  • Demir, Banu
  • Javorcik, Beata

Abstract

By its very nature, tax evasion is difficult to detect as the parties involved have an incentive to conceal their activities. This paper offers a setting where doing so is possible because of an exogenous shock to the tax rate. It contributes to the literature by proposing two new methods of detecting evasion in the context of border taxes. The first method is based on Benford's law, while the second relies on comparing price and trade cost elasticities of import demand. Both methods produce evidence consistent with an increase in tax evasion after the shock. The paper further shows that evasion induces a bias in the estimation of trade cost elasticity of import demand, leading to miscalculation of gains from trade based on standard welfare formulations. Finally, welfare predictions are derived from a simple Armington trade model that accounts for tax evasion.

Suggested Citation

  • Demir, Banu & Javorcik, Beata, 2018. "Forensics, Elasticities and Benford's Law," CEPR Discussion Papers 12798, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12798
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    Cited by:

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    2. Martin, Julien & Mayneris, Florian & Theophile, Ewane, 2020. "The price of remoteness: Product availability and local cost of living in Ethiopia," CEPR Discussion Papers 14515, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Benford's law; border taxes; tax evasion; trade financing;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General

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