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.
Details
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Author
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Document Date
2022/01/20
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Document Type
Policy Research Working Paper
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Report Number
WPS9907
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2022/01/20
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Disclosure Status
Disclosed
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Doc Name
Illicit Schemes : Fossil Fuel Subsidy Reforms and the Role of Tax Evasion and Smuggling
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Keywords
Tax Evasion; income quintile; Smuggling; fuel smuggling; Cash Transfer; fossil fuel subsidy; labour tax; cost of climate change; Research Support; national tax agency; small number of household; Fuel Subsidies; change in consumption; general equilibrium model; tax revenue; production tax; uniform cash transfer; quantity of fuel; household expenditure survey; fossil fuel consumption; balance of payment; Computable General Equilibrium; disaster risk management; first order condition; illicit activity; double dividend; natural resource revenue; environmental tax reform; lower tax rate; environmental tax rate; household level consumption; production tax revenue; reduction in consumption; education and health; fuel tax increase; effective tax rate; price of fuel; absolute poverty line; distribution of consumption; low income household; lack of credibility; direct financial benefit; current account deficit; Access to Electricity; Natural Resource Management; per capita expenditure; social accounting matrix; current account balance; informal economic sector; cost of labour; cost of labor; income tax reduction; Access to Energy; total consumption expenditure; bottom income quintile; effect on consumption; redistribution of resource; informal sector; Social Welfare; Petrol Tax; fiscal efficiency; petrol consumption; marginal change; intermediate input
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Citation
Maruyama Rentschler,Jun Erik Hosoe,Nobuhiro
Illicit Schemes : Fossil Fuel Subsidy Reforms and the Role of Tax Evasion and Smuggling (English). Policy Research working paper,no. WPS 9907 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/631951642691400564/Illicit-Schemes-Fossil-Fuel-Subsidy-Reforms-and-the-Role-of-Tax-Evasion-and-Smuggling