Import tax evasion and avoidance: Evidence from Iran

Kowsar Yousefi, Mohammad Vesal and Hanifa Pilvar

The Quarterly Review of Economics and Finance, 2020, vol. 75, issue C, 31-39

Abstract: While import taxes are easier to levy, there is increasingly more evidence that importers engage in trade tax evasion. The literature uses, trade gap, the difference between reports from the two ends of a trade link, as a proxy for illegal imports. Many papers have found a robust positive correlation between import tax rates and the trade gap. However, like any other tax, importers could avoid paying import duties through legal provisions. Such opportunities are abundant in Iran and could impose a downward bias on the evasion elasticity estimates. Using disaggregated trade reports from 21 partners and Iran Customs Administration from 2004 to 2013, we show three results. First, a one-percentage-point increase in the tax rate is significantly associated with a 1.8% increase in the trade gap. But once we control for avoidance, this effect increases to 2.5%. Second, there is a significant negative correlation between our avoidance proxy and the trade gap. Third, we document that a one-percentage-point increase in tariff rates is associated with a 0.6 percentage-point increase in tariff revenue. Assuming an inelastic import demand, the results suggest avoidance plays a greater role than evasion in tariff revenue reduction in response to an increase in tax rates. This finding indicates that the government could increase tariff revenue by cutting legal loopholes. Results are robust to many specification tests.

Keywords: Illegal imports; Tax evasion; Avoidance; Trade gap; Exemption (search for similar items in EconPapers)
JEL-codes: F13 H26 K42 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:75:y:2020:i:c:p:31-39

DOI: 10.1016/j.qref.2019.05.010

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