Measuring tariff evasion and smuggling (2009)

Tales of bribery and corruption date back to the beginning of recorded history. By the time the historian Suetonius was at work documenting the antics of Roman leaders, his chronicles were filled with extorting senators, vote-buying Caesars, and judges-for-sale. Needless to say, we do not want for stories of venality and excess among latter-day Caesars and senators. Whether it's the U.S. Senate seat that Illinois Governor Rod Blagojevich allegedly tried to sell to the highest bidder last year, or the Versailles in the jungle built with billions that some say were embezzled by Zaire's Mobutu Sese Seko, the corruption narrative is alive and well today. Yet we are not satisfied by stories--we want to see it in the data. For one thing, talk is cheap, so we don't know how much to trust casual retelling or survey evidence, particularly in a sensitive and secretive domain such as corruption. (Think about the incentives for truth telling in response to the question, How much did you pay in bribes last year?). For well-documented instances of corruption, we only observe cases that come to light via enforcement efforts, so lack of any evidence of misbehavior could be taken of proof that corruption is nonexistent--or so ubiquitous that the enforcers are on the take themselves. Recent years have seen a blossoming of corruption research in economics, focused on approaches to getting around the cheap talk problem in measuring illicit behavior. In a series of papers with Shang-Jin Wei, I have looked for ways of analyzing what happens when corruption meets globalization, by studying the role of smuggling and tariff evasion in international trade. Our work more broadly informs the discussion on how tax rates affect tax evasion. Our core methodology is based on the simple observation that shippers moving goods across international borders are asked not just once but twice about the contents of their containers: by export officials at one end and import authorities at the other. In both cases, false claims have real and material costs, ranging from the forfeiture of shipped goods to fines to prison time (and in some extreme cases, a death sentence). Yet the benefits of deceit often differ widely at the points of import and export. Where such benefits are low, we may plausibly take the reported figures at face value, and use them as a benchmark against which to compare the numbers that would-be smugglers report where deception is required to ply their trade. The idea of comparing mismatched import-export data isn't new. Jagdish Bhagwati observed back in 1964 that importers might underinvoice the value of their shipments as a means of evading tariffs, (1) and suggested that this might explain the gap between reported exports and imports in global trade data. With this as inspiration, Wei and I set about analyzing the gap between goods reportedly leaving Hong Kong destined for mainland China and those reported arriving in China from Hong Kong. (2) We were not interested in the level of this trade gap--many explanations ranging from reporting errors to transportation have been put forth to explain it--but rather its correlates. Most obviously, in the absence of any deliberate misreporting, there should be no relationship between tariff rates and the import-export reporting gap. It is tempting to presume that higher tariffs will necessarily increase evasion, since the benefits from evasion increase as the tariff rate goes up. But it turns out that this relationship depends crucially on the punishment for evasion and the stomach for risk among would-be evaders. Imagine, for example, that the penalty for attempted tariff evasion is a multiple of tariffs evaded--then both the benefit and cost of evasion increase when tariffs go up, and a risk-averse shipper will be more likely to opt for truthful reporting. Given the frequent ambiguity and discretion in penal codes and the diversity of risk preferences, the tariff rate/ tariff evasion relationship ultimately is an empirical matter. …