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

Posted: 8 Mar 2004

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

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.

Suggested Citation

Fisman, Raymond and Wei, Shang-Jin, Tax Rates and Tax Evasion: Evidence from Missing Imports in China. Journal of Political Economy, Vol. 112, pp. 471-96, April 2004. Available at SSRN: https://ssrn.com/abstract=515103

Raymond Fisman (Contact Author)

National Bureau of Economic Research (NBER)

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Boston University ( email )

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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)

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Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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