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Crossing the Border: Does Commodity Tax Evasion Reduce Welfare and Can Enforcement Improve It?

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  • Mary E. Lovely

Abstract

This paper compares discrete equilibria in which consumers do and do not evade commodity taxes by making cross-border purchases. When the government faces a revenue requirement, the comparison shows that border crossing reduces welfare if resources wasted by evasion exceed the benefit of consumption changes, where these changes reflect lower prices across the border and induced changes in domestic tax rates. Enforcement reduces welfare if administrative and uncertainty costs outweigh the benefits of consumption changes and the reduction in resource costs. The analysis shows that the welfare effect of evasion depends on how well designed the tax system is and how effective enforcement resources are in deterring border crossing.

Suggested Citation

  • Mary E. Lovely, 1994. "Crossing the Border: Does Commodity Tax Evasion Reduce Welfare and Can Enforcement Improve It?," Canadian Journal of Economics, Canadian Economics Association, vol. 27(1), pages 157-174, February.
    • Handle: RePEc:cje:issued:v:27:y:1994:i:1:p:157-74
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    Citations

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    Cited by:

    1. Mary E. Lovely, 1995. "Optimal Commodity Taxation With Costly Noncompliance," Public Finance Review, , vol. 23(1), pages 115-130, January.
    2. Ferris, J. Stephen, 2000. "The Determinants of Cross Border Shopping: Implications for Tax Revenues and Institutional Change," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(4), pages 801-824, December.
    3. Kazuki Onji, 2009. "A tale of pork prices : evasion and attenuation of a Japanese tariff," Trade Working Papers 22883, East Asian Bureau of Economic Research.
    4. Ferris, J. Stephen, 2000. "The Determinants of Cross Border Shopping: Implications for Tax Revenues and Institutional Change," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 801-24, December.
    5. William F. Fox & Matthew N. Murray, 2005. "Sales Taxation in a Global Economy," Contributions to Economic Analysis, in: Taxing the Hard-to-tax: Lessons from Theory and Practice, pages 221-244, Emerald Group Publishing Limited.
    6. Onji, Kazuki, 2014. "The price disparity analysis revisited: An application to pork imports in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 34(C), pages 1-23.
    7. Marion, Justin & Muehlegger, Erich, 2018. "Tax compliance and fiscal externalities: Evidence from U.S. diesel taxation," Journal of Public Economics, Elsevier, vol. 160(C), pages 1-13.
    8. Rossitza B. Wooster & Joshua W. Lehner, 2010. "Reexamining The Border Tax Effect: A Case Study Of Washington State," Contemporary Economic Policy, Western Economic Association International, vol. 28(4), pages 511-523, October.
    9. Kazuki Onji, 2009. "A Tale of Pork Prices: Evasion and Attenuation of a Japanese Tariff," Asia Pacific Economic Papers 382, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
    10. Nishaal Gooroochurn & Thea Sinclair, 2008. "Commodity Taxation in the Presence of Tourists," Tourism Economics, , vol. 14(4), pages 839-856, December.

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