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Illicit Schemes : Fossil Fuel Subsidy Reforms and the Role of Tax Evasion and Smuggling

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  • Maruyama Rentschler,Jun Erik
  • Hosoe,Nobuhiro

Abstract

This study develops a computable general equilibrium model for Nigeria, which accounts forinformality, tax evasion, and fuel smuggling. By studying the impact of fuel subsidy reform on consumption, taxincidence, and fiscal efficiency, it shows that the presence of illicit activities substantially strengthens the argumentin favour of subsidy reform: First, fuel subsidy reform can shift the tax base to energy goods, which are less prone totax evasion losses than for instance labour. Second, by reducing price differentials with neighbouring countries,subsidy reform reduces incentives for fuel smuggling. Overall, the results show that considering illicitactivities reduces the welfare losses of fuel subsidy reform by at least 40 percent. In addition, fuel subsidy reductions(and by extension energy tax increases) have a strong progressive distributional impact. The findings hold underdifferent revenue redistribution mechanisms, in particular uniform cash transfers and the reduction of pre-existinglabour taxes.

Suggested Citation

  • Maruyama Rentschler,Jun Erik & Hosoe,Nobuhiro, 2022. "Illicit Schemes : Fossil Fuel Subsidy Reforms and the Role of Tax Evasion and Smuggling," Policy Research Working Paper Series 9907, The World Bank.
    • Handle: RePEc:wbk:wbrwps:9907
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