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Tax evasion linked to imports is a cause for forming informal economy. Tax evasion decreases government revenue and makes restrictions in implementing economic policies. This paper investigates relationship between the tariff rate and tax evasion at the six- digit HS level on trade data of Iran and its twelve major trading partners during 2003 to 2008.  According to Bhagwati method, Tax evasion is defined as the discrepancy between the value of imports, reported by Iran, and the value of exports to Iran, reported by its trading partners. The results from estimated tax evasion models show that there is positive and significant relationship between the trading discrepancies or tax evasion and tariff rates among 27917 products. The elasticity of tax evasion with respect to tariff rates is 0.67, i.e. each one-percentage-point increase in the tariff rates raises tax evasion by 0.67 percent in case of total products. Additionally, the elasticity of tax evasion with respect to tariff rates is 0.8 for goods having tariff rates above average. In this case, tax evasion is more likely. The positive impact of tariff rate on tax evasion is not verified for goods having tariff rates lower than average.

Keywords: H26, K42, : Trade Discrepancy, Smuggling, Tariff rate, Tax evasion, Panel Data JEL Classification: F13, H26, K42

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