Stating import prices wrongly: Possibilities of tax and tariff evasion

Günther Schulze

No 138, Discussion Papers, Series II from University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy"

Abstract: This paper examines the possibility of a domestic producer evading taxes and duties by misstating the price of an imported intermediate good. In a qualitative response model it is shown that goverment's revenue maximizing behavior implies a detection function which depends positively on the amount of misdeclaration. As a consequence there exists, for every combination of (linear) import tariff and (linear) income tax, a unique declared price of the imported good which maximizes the expected (true, but not declared) profit. Whether under- or overdeclaration is optimal depends on the relative magnitudes of tax and tariff rates, whereas the amount of misdeclaration is determined by the specification of the detection function and the form of punishment.

Date: 1991
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