ABSTRACT:

The paper develops a static industry model of tax evasion with heterogeneous producers to look at the effects of tax policies, entry and penalty costs, and the probability of getting caught on the size of tax evasion. I assume that the probability of tax detection depends on the level of production. If the firm's production level is smaller than a predetermined level of output, then the firm is not going to be caught for tax evasion. Once the firm's production exceeds the output threshold, the tax evading firm faces a possibility of being caught and will be punished by the tax administration if caught. Under this assumption, I show that the firms which decide to go underground are small firms whereas large firms fulfill their tax obligations. I calibrate the model for the case of Russia for the year of 1998. To estimate the model, I use Goskomstat data, the World Bank data, and the micro-level data on 5537 Russian firms provided by ZAO "Russian investment corporation". Using the firm's level data, I elaborated the method that allows to identify tax evading firms. The model predicts that the higher tax rates encourage the concealment of activity. A larger informal sector is also generated by a higher lower bound of the output the government sets up to identify tax evaders. Higher entry costs reduce the number of operating firms. This will lower the number of tax evaders and reduces the size of shadow economy. An increase in the probability of detection and /or increase in penalty costs also lead to a reduction in the size of tax evasion.

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ABSTRACT:

In recent years, the International Monetary Fund (IMF), the World Bank and the members of the World Trade Organization (WTO) have criticized Russia for its high border taxes. Despite the first political attempt made in 2000-2001 to reduce import tariffs, the average tariff in Russia in 2003 was still in the range of 13 to 14.5 per cent, a level considerably higher than the OECD countries. Since Russia is a country heavily dependent on trade taxes, I focus on the fiscal impact of eliminating the tariff revenues as well as analyzing its potential effect on domestic production, price level, trade flows, and social welfare. I also analyze the effects of Russia's decision to impose high export taxes as an attempt to compensate for revenue loss. To conduct the analysis, I construct a static applied general equilibrium (GE) model and perform a series of numerical experiments, such as a partial and complete tariff elimination scenario. To calibrate the model, I work with an input-output (IO) table for the most recent year available, 2003, and construct a social accounting matrix (SAM) with a much higher degree of disaggregation and precision than any such matrix in the existing literature on Russia's economy. I find that tariff elimination reform has a positive effect in terms of trade diversification, but a negative effect in terms of consumer and social welfare. To compensate the budget loss, in my model the government can choose to impose either higher taxes on consumption or higher export taxes on foreigners. Both policies increase government welfare but decrease consumer and social welfare which in the long urn might lead to bigger economic losses

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