LEGAL AND ILLEGAL MARKETS FOR TAXED GOODS - PURE THEORY AND AN APPLICATION TO STATE GOVERNMENT TAXATION OF DISTILLED SPIRITS

• NCJ Number: 57605
• Author(s): R T SMITH
• Date Published: 1976
• Length: 60 pages
• Sale Source: National Technical Information Service
• Publication Type: Statistics
• Language: English
• Country: United States of America
• Note: RAND PAPER SERIES

Annotation

STATISTICAL TESTS ARE USED TO DISTINGUISH BETWEEN TRADITIONAL AND ALTERNATIVE THEORIES OF THE ECONOMIC IMPACT OF LIQUOR TAXATION, WITH EMPHASIS ON THE SIGNIFICANCE OF TAX EVASION.

Abstract

THE DISTINCTIVE FEATURE OF TRADITIONAL ANALYSIS IS THAT IT IGNORES THE PRESENCE OF TAX EVASION IN THE MARKET FOR TAXED GOODS AND PRODUCTS. ALTERNATIVE ANALYSIS IS BASED ON A TWO-MARKET MODEL TO STUDY THE RELATIONSHIP BETWEEN LEGAL AND ILLEGAL MARKETS FOR LIQUOR. THE LEGAL MARKET REFERS TO TRANSACTIONS THAT PAY EXCISE TAX, WHILE THE ILLEGAL MARKET REFERS TO TRANSACTIONS THAT DO NOT PAY EXCISE TAX. THE ALTERNATIVE ANALYSIS CONSIDERS PROPERTIES OF PRODUCT DEMAND AND SUPPLY CURVES FOR LEGAL AND ILLEGAL MARKETS AND EXAMINES HOW THE MARKET EQUILIBRIUM IS INFLUENCED BY CHANGES IN TAX RATES AND TAX ENFORCEMENT. IT IS AN EXERCISE OF PURE THEORY AND DOES NOT CONSIDER WAYS IN WHICH TAX EVASION OCCURS IN ACTUAL MARKET SITUATIONS. THE TWO-MARKET THEORY (LEGAL VERSUS ILLEGAL) IS APPLIED IN AN INVESTIGATION OF STATE GOVERNMENT LIQUOR TAXATION. CONSIDERATION IS GIVEN TO EXPECTED PUNISHMENT ASSOCIATED WITH THE MARKETING OF ILLEGAL GOODS, FACTOR SUPPLY CONDITIONS, FIRM SUPPLY BEHAVIOR, THE MARKET SUPPLY AND MARKET EQUILIBRIUM, THE ABILITY OF STATE GOVERNMENT TO ENFORCE TAX LAWS, IMPORTANT VARIABLES IN EVALUATING TAX EVASION AND TAX ENFORCEMENT (CONSUMPTION, MARKET PRICE, NET LEGAL PRICE, TAX RATE, ENFORCEMENT BUDGET, LOWEST TAX RATE OF ADJACENT STATE, RETAIL LICENSES, AND WHOLESALERS), AND PROBLEMS IN EMPIRICALLY ANALYZING THE IMPACT OF LIQUOR TAXATION ON ILLEGAL ACTIVITIES. LEGAL SUPPLY AND DEMAND EQUATIONS PROVIDE SUPPORT FOR REPLACING TRADITOINAL ANALYSIS WITH THE ALTERNATIVE MODEL OF TAXATION. GOVERNMENT RESPONSE TO TAX EVASION AND TAX ENFORCEMENT IS IMPORTANT BECAUSE IT INFLUENCES LEGAL AND ILLEGAL CONSUMPTION AND THE CONSUMER TAX BURDEN. ADDITIONAL STATE LIQUOR TAX ENFORCEMENT REDUCES THE LEGAL MARKET PRICE. FURTHER RESEARCH IS RECOMMENDED TO IMPROVE TAXATION ANALYSIS BY IDENTIFYING CHARACTERISTICS OF MARKETS AND POLITICAL JURISDICTIONS THAT INFLUENCE THE ABILITY OF STATE GOVERNMENT TO ENFORCE TAX LAWS. SUPPORTING DATA ARE PROVIDED, AND EQUATIONS ARE INCLUDED IN THE REPORT AND IN AN APPENDIX. (DEP)