petrol)<sup>7</sup> . This figure, in combination with the estimated size of the petrol sector, translates to a baseline subsidisation rate of 17.8%. Official (subsidized) petrol prices were set at N65/liter in 2011. This price creates incentives for a variety of illicit activities and commercial malpractice, including smuggling and black market sales which exploit local petrol shortages. As a consequence, actual petrol prices observed by households are often significantly higher than N65/liter (Kojima, 2016).<sup>8</sup> Nevertheless, observed petrol prices in Nigeria are still lower than in neighbouring countries, thus preserving an incentive for smuggling. Finally, population data has been obtained from the World Bank’s World Development Indicators database.

# _6.2. Tax evasion_

For the purpose of comparing sectors with high and low tax evasion, Liu (2013) uses the self-employment rate of an economy to approximate the size of the high-evasion sector. This approach works particularly well in developed and emerging economies, for which reasonably reliable estimates of self-employment are available from sources such as the International Labour Organization (ILO). However, the ILO’s Labour Statistics database offers no estimate of the selfemployment rate in Nigeria.

Instead of relying on uncertain alternative estimates for self-employment, this study uses the size of the informal sector as a proxy for the high-evasion sector. The advantage of this approach is that estimates of informal economic sectors exist for a wide range of countries – including developing countries. Specifically, the formal economy estimates from the GTAP 9 database are supplemented by including an informal sector, which in 2011 measured 50% of GDP according to the comprehensive analysis by Hassan and Schneider (2016).

This study uses a very conservative estimate of 2% for the tax evasion rate in the formal economy. For comparison, Liu (2013) uses a 5% evasion rate in a selection of 27 developed and emerging economies, based on estimates by Slemrod (2007). The Swedish National Tax Agency (2008) reports a 4.8% evasion rate for income taxes in its jurisdiction. In line with the notion of informality, this study assumes that the informal sector does not pay any taxes. Moreover, this study uses the conservative assumption by Liu (2013), that 10% of evaded taxes are spent on non-productive evasion activities (see Section 3). The net benefits of tax evasion are assumed to ultimately accrue to households; in line with the distribution shares of regular income, the top income quintile is assumed to benefit disproportionately more than lower quintiles.

Based on these numbers, the evasion parameters _A_<sup>_f_</sup> _h,j_<sup>,</sup><sup>_N_</sup> _h,j_<sup>_f_,</sup><sup>_Az_</sup> _j_<sup>,and</sup><sup>_N_</sup> _j_<sup>_z_are</sup> calibrated to characterise the evasion cost functions (Eq. 1 and 2).

> 7To make subsidy estimate comparable across countries, the IEA applies some aggregation and simplification assumptions. This results in a lower subsidy estimate than provided by the Nigeria Extractive Industries Transparency Initiative (NEITI, 2013), which estimates total subsidy payments in 2011 to be $12.4 bn. Of this sum, $7.3 bn were paid through the Petroleum Product Pricing Regulatory Agency (PPPRA) and $5.1 bn through the Nigerian National Petroleum Corporation (NNPC).

> 8The National Bureau of Statistics only reports observed petrol prices since 2014, hence we apply a 50% mark-up as a simplifying assumption for household petrol consumption.

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