HANA ROSS, Phd

HANA ROSS, PhD. MARCH 2015 Tobacconomics is a collaboration of leading researchers Melinda Gates Foundation and the African Capacity Building who have been studying the economics of tobacco control Foundation. The aim of this project is to expand current policy for nearly 30 years. The team is dedicated to helping research efforts in the economics of tobacco control and to researchers, advocates and policymakers access the latest enhance the knowledge of economic and tax issues among and best research about what’s working—or not working— tobacco control advocates and policymakers to strengthen to curb tobacco consumption and the impact it has on support for tobacco tax and price increases in sub-Saharan our economy. As a program of the University of Illinois at Africa. Visit www.tobaccoecon.org. Chicago, Tobacconomics is not affiliated with any tobacco manufacturer. Visit www.tobacconomics.org or follow us on Ross H (2015). Understanding and measuring tax avoidance Twitter www.twitter.com/tobacconomics. and evasion: A methodological guide. Prepared for the The Economics of Tobacco Control Project is hosted Economics of Tobacco Control Project¸ School of Economics, by the South African Labour and Development Research University of Cape Town and Tobacconomics, Health Policy Unit at the School of Economics, University of Cape Town Center, Institute for Health Research and Policy, University in partnership with the American Cancer Society, the Bill & of Illinois at Chicago. Acknowledgements The author would like to thank the following individuals for their assistance in reviewing drafts of this document: Johanna Birckmayer, PhD, MPH, Frank Chaloupka, PhD, Grieve Chelwa, PhD, David Merriman, PhD, and Guillermo Paraje, PhD. The guide is available at: http://tobaccoecon.org/publications/reports/ http://tobacconomics.org/research/ Design by Parrilla Design Workshop MARCH 2015 Contents Executive Summary 2 Introduction 4 Definitions 5 Chapter 1: Theory of Tax Avoidance and Tax Evasion and Its Impact 7 1.1 Overview 1.2 Theory of Tax Avoidance and Tax Evasion 1.3 Impact of Tax Avoidance and Tax Evasion Chapter 2: How to Measure the Scope of Tax Avoidance and Evasion 12 2.1 Survey of Tobacco Users 2.2 Examination of Cigarette Packs 2.3 Compare Tobacco Sales and Consumption (gap analysis) 2.4 Econometric Modeling 2.5 Other Methods 2.6 Summary and Recommendations for Estimating the Scope of Tax Avoidance and/or Evasion Chapter 3: Assessing the Quality of the Estimates 32 Conclusions and Summary 47 References 48 -1- illegally econometric transported modeling consumption full-taxExecutive Summary tobacco tax paid sales This Methodological Guide updates and expands the It concludes that tax avoidance/evasion may reduce, monitoring smuggling 13-year old World Bank Toolkit on how to estimate the but do not eliminate the effectiveness of tobacco tax low-tax tobacco tax scopeExecutive of tobacco smuggling. It draws Summary on the results of increases in reducing tobacco use and raising revenues. numerous empirical studies that tested the applicability The motivation for a government to address tax trade evasion illicit trade of five methods described in the Toolkit while critically avoidance/evasion is directly linked to the size of the evaluating new methods that emerged in response to revenue loss while the effectiveness of the interventions thethis evolving methodological nature of illicit tobacco trade, the policy dependsthe definitions on the level of enforcement. The level of guidedebates surrounding the issue, and the development of sectionenforcement is directly linked to the level of investment new technologies. to combat tax evasion/avoidance. updates and expands the 13-year-old World Bank begins by defining key variables. It explains the ThisToolkit guide on howcovers to notestimate only smugglingthe scope ofof tobacco tobacco difference between “smuggling”, “illicit trade”, products,smuggling. but It drawsalso tax on evasion the results related of numerous to illicit tobacco the“tax evasion” second and “tax chapteravoidance”, and is describes central to the tradeempirical and studieslegal tax that avoidance, tested the since applicability the methods to behaviorsGuide and that describes constitute eleven either methods tax evasion of measuring or tax estimatesof five methods these phenomena described in are the often Toolkit intertwined. while It avoidance.the scope of Tobacco tax avoidance products and that tax avoid/evade evasion: surveys all or ofa alsocritically provides evaluating guidance new on methods how to assessthat emerged the quality in portiontobacco ofusers, the requiredexamination taxes of are cigarette defined packs as “low-tax” obtained ofresponse existing to estimates, the evolving including nature thoseof illicit offered tobacco by the products,from smokers, while examination the rest of tobacco of discarded products cigarette fall into tobaccotrade, the industry. policy debates Unlike surroundingthe World Bank the Toolkit, issue, this thepacks, category examination of “full-tax” of cigarette products. packs obtained from guideand the does development not cover theof new topic technologies. of how to reduce tax retail, comparison of sales with consumption (Gap avoidance and tax evasion and instead refers the reader Analysis), econometric modeling, comparison of tax This guide covers not only smuggling of tobacco paid sales with estimated consumption, comparison products,to the WHO but FCTC also tax Protocol evasion torelated Eliminate to illicit Illicit Trade in Tobacco Products. of actualthe and firstprojected tobacco tax revenue, key tobacco trade and legal tax avoidance, since the informant interviews, monitoring tobacco trade, and methods to estimates these phenomena are often 1analyzingchapter seizures of illegally transported tobacco. theintertwined. definitions It also provides guidance section on how beginsto Thelays thechapter theoretical begins foundation with a brief for overview the methods of the andmain byassess defining the quality key variables. of existing It estimates,explains the including difference principlesdescribes theof conductingimpact of tax research, avoidance which and are tax applicable evasion betweenthose offered “smuggling”, by the tobacco “illicit trade”,industry. “tax Unlike evasion” the and toon allthe methods. supply of Then and demandthe Guide for provides tobacco a products, step-by-step “taxWorld avoidance”, Bank Toolkit, and this describes guide doesbehaviors not cover that constitute descriptionon tax revenue, of the on specifics the price ofelasticity each the of demand,method, starting eitherthe topic tax ofevasion how to or reduce tax avoidance. tax avoidance Tobacco and products tax withand onthose the mostaffordability frequently of discussedtobacco products. in the literature, thatevasion avoid/evade and instead all orrefers a portion the reader of the to required the WHO taxes followedWe provide by insightapproaches into thethat economic, are unique social, to certain areFCTC defined Protocol as “low-tax” to Eliminate products, Illicit Tradewhile thein rest of marketand political conditions determinants and approaches of tax avoidance suffering and from tobaccoTobacco products Products. fall into the category of “full-tax” multipletax evasion, weaknesses. including Each factors method such ashas price/tax a background products. sectiondifferences, that linksthe tax it tostructure, theory, athe list costsof pros of andobtaining cons, andlow-tax a recommendation products, the costs when of aovercoming particular methodlegal shouldand regulatory be used. obstacles, The application informal of distributioneach method is the first chapter lays the theoretical demonstratednetworks, and bythe examples. level of corruption. This chapter foundation for the methods and describes the impact demonstrates how tax avoidance and tax evasion of tax avoidance and tax evasion on the supply of and impactThe chapter average concludes cigarette that prices, there the is pricenot a elasticitysingle method demand for tobacco products, on tax revenue, on the ofthat tobacco will produce demand, a definitive brand proliferation, estimate, becauseand other all of price elasticity of demand, and on the affordability of tobaccothem have control advantages policies. and disadvantages. Since the tobacco products. We provide insight into the economic, weakness of a particular approach can be exacerbated social, and political determinants of tax avoidance byThis specific chapter marketconcludes conditions, that tax it avoidance/evasion is important to use and tax evasion, including factors such as price/tax localmay reduce,specific but knowledge do not eliminate, and creativity the effectiveness when applying differences, the tax structure, the costs of obtaining theseof tobacco methods. tax increases Given the in complexity reducing tobacco of tobacco use taxand low-tax products, the costs of overcoming legal and avoidanceraising revenues. and evasion The motivation and the methods’ for a government limitations, to it regulatory obstacles, informal distribution networks, isaddress important tax avoidance/evasion to triangulate the isestimates directly oflinked the scopeto the and the level of corruption. This chapter demonstrates ofsize the of problemthe revenue using loss different while the methods.effectiveness Many ofstudies the how tax avoidance and tax evasion impact average applyinterventions the same depends method on over the time level in of order enforcement. to capture cigarette

Load more