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

Maruyama Rentschler,Jun Erik; Hosoe,Nobuhiro

This study develops a computable general equilibrium model for Nigeria, which accounts for informality, tax evasion, and fuel smuggling. By studying the impact of fuel subsidy reform on consumption, tax incidence, and fiscal efficiency, it shows that the presence of illicit activities substantially strengthens the argument in favour of subsidy reform: First, fuel subsidy reform can shift the tax base to energy goods, which are less prone to tax 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 illicit activities 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 under different revenue redistribution mechanisms, in particular uniform cash transfers and the reduction of pre-existing labour taxes.

disaster risk management tax revenue tax evasion smuggling computable general equilibrium effective tax rate labour tax environmental tax reform general equilibrium model current account deficit production tax current account balance natural resource management fuel subsidies cash transfer balance of payment research support income quintile illicit activity education and health fossil fuel subsidy distribution of consumption access to electricity fossil fuel consumption change in consumption low income household per capita expenditure lack of credibility first order condition reduction in consumption cost of climate change quantity of fuel price of fuel fuel smuggling natural resource revenue household expenditure survey small number of household absolute poverty line lower tax rate double dividend social accounting matrix direct financial benefit national tax agency environmental tax rate fuel tax increase household level consumption production tax revenue uniform cash transfer