ABSTRACT
The present chapter focuses on the causal relationship between trade tax rates and evasion in Mozambique. In so doing, it also investigates distinct forms of tax evasion. Clearly, the empirical problem presented when studying tax evasion is that, by its very nature, evasion is not easy to measure. The methodology employed, originally pioneered by Fisman and Wei (2004), permits the measurement of evasion with some precision by aligning and comparing (at the product level) bilateral trade flow data between Mozambique and its largest trading partner, South Africa. The chapter is organized as follows. Section 2 provides a brief review of
the public finance literature related to tax evasion in developing countries. Section 3 outlines the regression framework adopted to understand the empirical link between evasion and tax rates. Section 4 describes general aspects of the data used in the regression models, highlighting idiosyncrasies of Mozambique trade flow data. Section 5 discusses results and Section 6 simulates economic implications of alternative tax rates for tax evasion and customs revenue using the estimated results. Section 7 concludes. The chapter tackles three central questions:
1 To what extent is there a connection between tax evasion at the border and trade tax rates in a typical Sub-Saharan African country? The results suggest a positive impact of tax rates on tax evasion, albeit half of that found by Fisman and Wei for an Asian country like China. On average, an increase in trade taxes of one percentage point prompts an upward response in tax evasion of about 1.4 per cent.
