Technical Report Illicit dealings: Fossil fuel subsidy reforms and the role of tax evasion and smuggling

RENTSCHLER, Jun E.  ,  HOSOE, Nobuhiro

17-052017-07 , GRIPS Policy Research Center
This study develops a computable general equilibrium model for Nigeria to study the impact of fossil fuel subsidy reform - and energy taxes - on key economic parameters, including consumption, income distribution, tax incidence, and fiscal efficiency. The model also examines the role of informality, tax evasion, and fuel smuggling, and shows that these factors can substantially strengthen the argument in favour of subsidy reform. The study shows that redistributing revenues from subsidy reform using uniform cash transfers has a strong progressive (i.e. pro-poor) distributional effect. Moreover, redistributing reform revenues by cutting pre-existing labour taxes not only increases fiscal effciency, but also reduces the welfare losses associated with tax evasion, which in turn reduces the welfare costs of reform by up to 40%. Regardless of the method of revenue redistribution, reducing subsidies diminishes the incentives for fuel smuggling, and hence the welfare losses associated with it.
The authors gratefully acknowledge that this work was supported by a JSPS KAKENHI Grant (No. 16K03613).

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