Frank J. Chaloupka Distinguished Professor, UIC
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Transcript of Frank J. Chaloupka Distinguished Professor, UIC
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Frank J. ChaloupkaDistinguished Professor, UIC
Director, WHO Collaborating Centre on the Economics of Tobacco and Tobacco Control
Tax Avoidance & Evasion
An Overview
Effective Implementation of FCTC PoliciesPre-Conference Workshop, 15th World Conference on
Tobacco or Health, Singapore, 19 March 2012
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Overview
Types of tax avoidance & evasion Measuring tax avoidance & evasion Determinants of tax avoidance &
evasion Impact of tax avoidance & evasion
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Definitions
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Tax Avoidance & Evasion• Many terms used:
Illicit trade, contraband, smuggling, bootlegging, counterfeit, etc.
• Tax Avoidance Legal methods for avoiding tobacco taxes
• Tax Evasion Illegal methods for avoiding tobacco taxes
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Tax Avoidance & Evasion• Individual tax avoidance
Reservation, Internet and other direct, duty-free, and cross-border purchases
• Generally not illegal, but states require local taxes to be paid
Brand/product switching, carton purchases, use of cheaper outlets
• Bootlegging Small scale purchasing of cigarettes in low-
tax/price jurisdictions for resale in high tax/price jurisdictions
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Tax Avoidance & Evasion• Large scale, organized smuggling
Illegal transportation, distribution and sale of large consignments of tobacco products
Generally avoids all taxes
• Counterfeit products bearing a trademark without the
approval of the trademark owner Often involved in organized smuggling
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Tax Avoidance & Evasion• Illegal Manufacturing
Unreported or under-reported manufacturing, distribution and sale of large consignments of tobacco products
Generally avoids all taxes Often involved in organized smuggling
• Brand Repositioning Industry changes in pricing, packaging,
product design, etc. that change tax rate applied to product
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Measurement
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Measuring Avoidance & Evasion
• Difficult to measure given illegality
• Variety of approaches used Each captures different pieces None fully captures all tax avoidance and evasion
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Measuring Avoidance & Evasion
• Comparing recorded exports of tobacco products to recorded imports
Difference reflects leakage into black markets
Recent estimates suggest 20-30 percent of exports do not appear as imports
4-10 percent of global consumption Will be largely organized smuggling
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Extent of Illicit Trade Increasing Gap in Quantity of Global Cigarette Trade
(Export minus Import) 1960-2003
0
200000
400000
600000
800000
1000000
1200000
1400000
Impo
rt an
d Ex
port
s (M
illio
n pi
eces
)
Import Export
Quantity of Export & Import Gap Widening
Highest gap in 1996 399.6 billion pieces36% of global exports
2000: 14% trade gap121 billion pieces
Source: ECOSOC Trade Database: Ayda Yurekli
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Measuring Avoidance & Evasion• “Expert Opinions”
Customs officials, tobacco industry representatives, tax authorities, and others
• Potential bias in some sources
Widely varying estimates across countries
Recent estimates 10-12% Again, largely reflecting organized
smuggling
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Tax Avoidance and Evasion
Source: Tobacco Atlas, 3rd edition
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Measuring Avoidance & Evasion• Individual tax avoidance a bit
easier to assess Econometric analyses of tax paid sales
that account for various factors, including:
• tax/price differences• population density • travel patterns• Distance
US estimates suggest up to 12.5% of total consumption in early 2000s
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Measuring Avoidance & Evasion• Individual tax avoidance – self-
reported data International Tobacco Control Policy
Evaluation Study Tobacco Use Supplement to the
Current Population Survey European Survey on Economic Aspects
of Tobacco Use Others
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Measuring Avoidance & Evasion• Individual tax avoidance – self-reported
data Tobacco Use Supplement to the Current
Population Survey• Periodic state representative, cross-sectional
samples • Includes questions on price paid, whether or not
purchased in own state, other state or through other channels (e.g. Internet or phone) – 2003 and 2006/07 surveys only
• Does not pick up in-state tax avoidance (e.g. reservation purchases)
• 2003: 5.63% 2006/07: 5.19%
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Tax Avoidance – United States
Source: Tax Burden on Tobacco, 2008 and TUS-CPS
% Tax Avoiders, 2006/07
5.88%
0.00%
5.00%
10.00%
15.00%
20.00%
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Tax Avoidance – United States
Source: Tax Burden on Tobacco, 2008 and TUS-CPS
% Other Tax Avoiders, 2006/07
0.86%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
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Pack InspectionB10) Please, could you show me the latest pack of cigarettes or hand rolling tobacco that you bought?
No 1Yes 2 INTERVIEWER: COLLECT ALL THE FOLLOWING INFORMATION FROM THE PACK. IF IT IS NOT POSSIBLE TO SEE THE LATEST PACK BOUGHT, THEN ASK THE INTERVIEWEE TO PROVIDE THE INFORMATION REQUIREDIf you do not have it with you, could you remember the following information on your last pack of cigarettes or hand rolling tobacco? b) Health warningsHealth warnings in [country specific] language 1Health warnings in foreign language 2Lack of health warnings 3
EU Tobacco/Economics Survey
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EU Tobacco/Economics Survey
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Pack InspectionB10) Please, could you show me the latest pack of cigarettes or hand rolling tobacco that you bought?
No 1Yes 2 INTERVIEWER: COLLECT ALL THE FOLLOWING INFORMATION FROM THE PACK. IF IT IS NOT POSSIBLE TO SEE THE LATEST PACK BOUGHT, THEN ASK THE INTERVIEWEE TO PROVIDE THE INFORMATION REQUIREDIf you do not have it with you, could you remember the following information on your last pack of cigarettes or hand rolling tobacco? c) Tax stamp (banderole)[Country specific] stamp 1Foreign stamp 2Stamp removed or destroyed 3Lack of stamp/Duty-free pack 4
EU Tobacco/Economics Survey
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EU Tobacco/Economics Survey
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Measuring Avoidance & Evasion• Combining methods
Expert Opinions• Potentially most comprehensive
Econometric modeling• Cross-border shopping, bootlegging
Self-report and pack inspection• Mix of individual avoidance and
bootlegging/smuggling
Littered pack collection• Mix of all activities, but may overstate problem
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Determinants
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Determinants of Avoidance & Evasion
• Tax and price differentials More important for individual tax avoidance
and bootlegging Larger scale efforts avoid all taxes
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Tax Avoidance – United States
Source: Tax Burden on Tobacco, 2008 and TUS-CPS
Cross Border Tax Avoidance and State Cigarette Taxes, 2006/07
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
$0.00 $0.50 $1.00 $1.50 $2.00 $2.50
State Tax per Pack
% T
ax A
void
ers
k
The illicit cigarette market share (%) and the average cigarette pack price($) in high, middle and low income
countries in 2007.
high income middle income low income 0
1
2
3
4
5
6
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
5$ 2$ 1$
10% 12% 17%
cigarette pack price
Source: WHO & IUATLD, 2009
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• Corruption
• Weak tax administration Absence of tax stamps; weak or non-existent
physical controls; unlicensed manufacturers, distributors, retailers; weak customs authorities
• Poor enforcement Limited resources for border patrols, customs
authorities, etc; low penalties
Determinants of Avoidance & Evasion
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Smuggling and Corruption
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• Presence of informal distribution channels
e.g. Street vendors, unlicensed distributors
• Presence of criminal networks e.g. Organized crime, terrorist organizations
Determinants of Avoidance & Evasion
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Policy Options
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Impact of Avoidance & Evasion
IARC Handbook 14:• Sufficient Evidence that tax avoidance
and tax evasion reduce, but do not eliminate, the public health and revenue impact of tobacco tax increases
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Does NOT Eliminate Health Impact of Taxes
Source: Tax Burden on Tobacco, 2008 and TUS-CPS
Cigarette Prices and Adult Prevalence, New York, 1995-2007
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1995 1997 1999 2001 2003 2005 2007
Prev
alen
ce
$2.75
$3.25
$3.75
$4.25
$4.75
$5.25
$5.75
$6.25
$6.75
Pric
Prevalence Price (2008 dollars)
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Cook County Cigarette Tax and Tax Revenues - FY01-FY06
$0.15
$0.35
$0.55
$0.75
$0.95
$1.15
$1.35
$1.55
$1.75
2001 2002 2003 2004 2005 2006
Fiscal Year
Tax
per P
ack
$25,000,000
$45,000,000
$65,000,000
$85,000,000
$105,000,000
$125,000,000
$145,000,000
$165,000,000
$185,000,000
$205,000,000
$225,000,000
Tax
Reve
nues
Tax Revenues
Chicago tax risesfrom 16 to 48 cents
Chicago tax upto 68 cents, 1/1/06Chicago smoking ban, 1/16/06
Does NOT Eliminate Revenue Impact of Taxes
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Impact of Avoidance & Evasion
World Bank Policy Report:• Rather than forego tax increases,
appropriate response is to crack down on illicit trade
IARC Handbook 14:• Strong evidence that a coordinated set of
interventions that includes international collaborations, strengthened tax administration, increased enforcement, and swift, severe penalties reduces illicit trade in tobacco products