Tax evasion in Kenya and Tanzania: Evidence from missing imports

In this paper we estimate the amount of tax evasion in customs authorities in both Kenya and Tanzania by calculating measurement errors in reported trade flows between the two countries and correlate those errors with tax rates. We find that the measurement error is correlated with the tax rates in Tanzania. We also introduced a third country into our analysis, the United Kingdom, and tax evasion seems to be more severe in trade flows between Kenya and Tanzania compared to trade flows between the United Kingdom and Kenya/Tanzania. Finally we also find that the tax evasion coefficient is lower in the Kenya-United Kingdom case compared to the Tanzanian-United Kingdom case which suggests that tax evasion is more severe in the Tanzanian customs authority.