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Taxes rates, economic crisis and tax evasion: Evidence using Zimbabwe and South Africa bilateral trade flows

Prompted by the theoretical ambiguity in the relationships between tax rates and tax evasion, this study investigates the relationship between tariff (tax) rates and tax evasion using highly disaggregated trade data for Zimbabwe and South Africa. The study uses cross-sectional data analysis for three periods; pre-crisis (1980 to 1999), crisis (2000-2008) and post-crisis (2009-2014). The results show different responses of tax evasion to tariff changes in the three periods. During both the pre-crisis and post-crisis periods, a decrease in tariff rates is associated with a reduction in tax evasion, while during the crisis period, a decrease in tariff rates is associated with an increase in tax evasion. The results suggest that tariff reduction during an economic crisis is not always associated with a decrease in tax evasion. Further disaggregating products using Rauch and UNCTAD product classification show that tariff changes have a positive impact on tax evasion for consumer goods and differentiated products.

Working paper 593
1 April 2016
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