Ending abuse of power by the ruling elites was one of the chief demands of those who took to the streets during the Arab Spring protests. Our new research paper unveils the scale of such abuse.It documents evidence suggesting that firms owned by former President Ben Ali and his family were more likely to evade import tariffs during his tenure, circumventing at least 1.2 billion USD worth of taxes on account of their political connections between 2002 and 2009. Whereas under-reporting of taxes by firms previously owned by the Ben Ali family seems to have subsided since the Jasmin Revolution, overall evasion has escalated.
How do we know?
Verifying tax declarations is notoriously difficult. In the case of taxes on imported goods, however, counterpart declarations by exporters, which have limited incentives to lie about how much they have sold abroad, can be used to detect potential tax fraud.
If imports are reported correctly, they must be very close to exports reported in countries that send goods to Tunisia. However, if imports are declared incorrectly – or not at all – so-called “evasion gaps” may arise. These are measured as the difference between exports reported in countries selling goods to Tunisia and imports of those same goods reported in Tunisia; the higher this difference, the more imports are “missing” and the less revenue Tunisian customs collects. Such evasion gaps are typically largest for goods subject to high tariffs, for which evasion is most lucrative, and have become a standard proxy for tax evasion.
In Tunisia, evasion gaps were highest for products imported by Ben Ali owned firms, and especially large when such products were subject to high tariffs. These gaps were due to under-reporting of prices and the evidence suggests connected entrepreneurs were the main perpetrators; Ben Ali owned firms reported significantly lower prices as their competitors for the same goods imported from the same country (and consequently paid less tax for those same goods) with the gap between Ben Ali prices and other firms’ prices widening with the tariff rate.
Moreover, firms that were privatized started reporting significantly lower import prices if they were sold to the Ben Ali family, whereas reported unit prices were virtually unchanged when they were sold to non-connected entrepreneurs.
Why should we care?
At issue are not only inequity and fiscal losses, but also inefficiency since tariff evasion endows perpetrators with a cost advantage over those who are compliant that is not based on performance
What has happened after the revolution?
The Revolution led to a reduction in evasion and under-reporting of unit prices in product lines where the Ben Ali family had been active, but sparked an increase in evasion overall. In spite of curtailed capture by the Ben Ali clan, if anything, corruption has intensified. This leaves us with an important question: Did the revolution democratize corruption in Tunisia?
Please share with us any potential answers you might have.
Many thanks to Narayan and Belkis for their respective observations on Nepal and the importance of transparency.
As for Jean-Pierre, many thanks for your comment as well – last Friday was indeed a very dark day for all Tunisians and their honored guests. Yet let me emphasize that the date of publication of this new report is entirely unrelated to the awful attack in Sousse (please note that the report was released before this event took place). We are deeply saddened by this attack, and our thoughts are with the victims and their families.
Further, our aim was not to accuse individuals, but rather to point out the pitfalls in postponing reforms that limit the scope for reducing opportunistic behavior and reduce corruption. In spite of increased access to information and institutional reforms that promote inclusive governance, Tunisia still has some way to go in getting rid of the dysfunctional policy infrastructure instituted during the Ben Ali era that was in part designed to facilitate evasion. The World Bank is working with the Tunisian government to help them institute policies that help the poor and can catalyze growth. For example, our colleagues who are working with customs are helping them limit fraud. The new study on tariff evasion helps them identify systemic vulnerabilities by documenting how evasion happened, which can in turn help improve the design of policies to reduce tax evasion (and thus generate much needed funds for the Tunisian government which can be used to help the poor).
Once again, the WBG is totally insensitive to the circumstances prevailing in the country to share this info.
It is all about transparency. People governed under any regime may see corruption as a right if and when it is sort of embedded in the daily life. Then the ruling party opts to grasp the whole network by themselves rather then rehabilitation and/or the correction of the malfunction..so yes the corruption then democratized. The way out is to make the whole system so simple to understand and trace with full transparency. Apple may be an ideal example of such an app
Yes, that is perfectly possible. In Nepal, every political changes have spurred corruption. In early 1950s when the country abolished Rana oligarchy and established parliamentary democracy, corruption increased leading to the drafting of anticorruption law. Similar phenomenon was observed again in 1990s when the country reinstated multiparty democracy that was snatched away by the King in 1960. It does not mean that monarchy regime (1960-1990) was free of corruption. Corruption became democratized after 1990 - meaning a free for all activity. The political change in 2006 institutionalized corruption.