The micro-geography of tax avoidance: Evidence from littered cigarette packs in Chicago

Listed in:

• Measuring illicit trade
• Determinants of illicit trade
• Estimated size of illicit market
• Illicit trade

Abstract

The large tax differentials between Chicago and neighboring jurisdictions provide an incentive for cigarette tax avoidance. Data from a random sample of cigarette packs littered in Chicago reveals a startling degree of tax avoidance: three-quarters did not display a Chicago tax stamp. Also, the $2.68 difference between the tax in Chicago and surrounding counties decreases the probability of a local stamp by almost 60 percent, and a one mile increase in distance to the lower-tax state border increases the probability a pack of a local stamp by about one percent. These results are consistent with the predictions of economic theory.