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

37 Pages Posted: 20 Dec 2001

See all articles by Raymond J. Fisman

Raymond J. Fisman

National Bureau of Economic Research (NBER); Boston University

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Multiple version iconThere are 2 versions of this paper

Date Written: December 2001

Abstract

Tax evasion, by its very nature, is difficult to observe. In this Paper, we present a case study of tax evasion in China. The novel feature of our approach is that at a very disaggregated level of individual products, we can measure evasion relatively precisely, by comparing the values that China reports as imports from Hong Kong, with what Hong Kong reports as exports to China. We can match up this "evasion gap" with the tariff and VAT tax schedule at the product level. The result is striking: using the data in 1998, we find that on average, a 1% increase in the tax rate results in a 3% increase in evasion. The result is similar when a first-difference specification is used with data in 1997 and 1998. This relationship is nonlinear: the evasion elasticity is larger at high tax levels. Furthermore, the evasion gap is negatively correlated with the tax rates on closely related products, suggesting that part of the evasion takes place by mis-reporting the type of imports, in addition to under-reporting the value of imports. This effect is even more pronounced when the evasion gap is measured using quantities rather than values.

Keywords: Tax evasion, Laffer curve, corruption

JEL Classification: F10, H20

Suggested Citation

Fisman, Raymond and Wei, Shang-Jin, Tax Rates and Tax Evasion: Evidence from 'Missing Imports' in China (December 2001). CEPR Discussion Paper No. 3089. Available at SSRN: https://ssrn.com/abstract=294243

Raymond Fisman (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
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Shang-Jin Wei

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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