What Drives Tax Evasion? Exploring the Prevalence of Illicit Trade in Cigarettes

• In Event: Race/Ethnicity, Immigration, Illicit Markets, and Crime

Abstract

Illicit trade in tobacco products (ITTP) is a common crime in some parts of the US. We analyze a large, novel set of data on ITTP. Data on the tax-paid and counterfeit status from several dozen collections in major U.S. cities during 2010-2015 are available, encompassing more than 100,000 pack observations. We find that the incidence of cigarette-tax avoidance and ITTP varies substantially across cities in our sample; New York City, Buffalo, and Chicago have high rates of tax evasion and avoidance but Minneapolis has almost none.
In our econometric investigation, we explore the neighborhood and other determinants of ITTP. Part of the variation in ITTP is due to neighborhood effects, whether indirectly through the differing demographic makeup of the areas or directly through the normalization of this type of criminal behavior. Given the precisely defined, small geographic areas we are able to examine, we can explore how a host of demographic and economic characteristics of an area are correlated with ITTP. We also find that tobacco tax levels and differentials with neighboring jurisdictions are important determinants of ITTP.

Authors

• James E. Prieger, Pepperdine University

• Jonathan Kulick, New York University