Misinvoicing Imports: the Interdependence of Tax and Tariff Evasion

Abstract

This article shows how tax systems can be made compliance enforcing by the requirement that taxable objects be declared consistently for different taxes. Pars pro toto we analyze an importer of inputs who can partly evade income taxes and duties by misdeclaring the same import price to both tax and customs authorities. We show that, first, revenue-maximizing authorities audit with an endogenous probability that depends positively on the extent of misdeclaration; second, the profit-maximizing importer will either over- or underinvoice, the sign of misdeclaration depending on the relative tax and tariff rates, whereas the extent of misdecla ration is determined by the detection function and the penalty; third, setting tax and tariff rates appropriately will reduce or eliminate evasion, if authorities cross-check.