Administrative Costs and Tariff Rates in the Presence of Customs Evasion: Evidence from Ecuador

Round 1

Reviewer 1 Report

Thank you for the paper. The mathematical modelling is impressive, but the presentation and discussion is yet to be improved. The biggest problem is the level of English, which make paper difficult to understand. Also a lot of parameters, variables and the way you apply the model need to be explained. I add some comments below.  

• Please do no combine references in endnotes, web pages in text and in the section References. The references on data sources should be included to References ie.g. endnote 1)
• English needs substantial corrections: „ However, the boom in 25 international trade affected by the lack of agreement in the Doha Round of trade negotiations and 26 mainly by the financial recession of 2008, so there has talked about a change of era.“ In the second clause subject is missing.
• „ However, at the time of establishing protectionist measures, does it 30 carefully to analyze whether the allocation of monetary resources to enforce the law affects 31 administrative efficiency?“ Word choice.
• „ Its tariff rate, most-favoured-nation, simple mean,“ Unclear, what most favorite nation means.
• The variables in the equation 1 should be explained more clearly. What is a simple average of „MFN applied duties“ ? average across what? The other variables are also not clear. Why the authors choose the particular functions and the ratios they state  in equation 1?
•  
• For the equation
• Log (1-e) t = α + β log (S/R) t – ? log (τ) t + δ log (PIB/PIB-1) t + at
• Why there is – before ?? Is not ? the coefficient you want to estimate including the sign?
• “‘I’ corresponds to the declared value of imports reported by Ecuador and ‘E’ corresponds to the 156 exports reported by Ecuador's trading partners (mirror imports) at one time.” I did not find I or E in the equation. Supposedly it should have been (1-e)?
• “The export-related information ‘E’ has obtained from the Trade Map Database, developed by the 161 International Trade Centre (ITC) in cooperation with the United Nations Conference on Trade and 162 Development (UNCTAD) and the World Trade Organization (WTO). The tool is freely accessible and 163 is available at the following electronic link trademap.org”
• Please include the reference to the list of references. Add the date of access to the we page. Similar holds for “Therefore, in order to avoid errors and achieve the greatest possible 166 coincidence of import and export flows, the foreign trade database of the Ecuadorian Central Bank 167 https://www.bce.fin.ec/index.php/component/k2/item/762-sector-externo will be used, which 168 presents information on the FOB value of imports made ‘I’ by Ecuador.”
• “When the equation for model 1 fit to the data, the result is: 226 Log (1-e) = - 0.03723 log (S/R) - 0.15756 log (τ) + 2.26551 (PIB/PIB-1) + (0.04907 /1-L) I 2016q2 +0.05480 I 2014q3 - 0.06221 I 2008q3 + 0.06142 I 2009q4 - 0.05475 I 2015q1 - 0.04908 I 2007q3 - 0.04198 I 2011q2 - 0.03826 I 2013q2 - 0.03504 I 2008q1 + (1/ 1-0.71136 L) at ”
• This equation needs to be numbered and explained. What is 1-L, q1, q2, ….?
• “The correlations between the estimated parameters are 240 small and the residues are random” You meant autocorrelations?
• More discussion should be added about the situation with willingness to pay custom and tax es in Equador (and Chile? You mention in in the paper but not in the title)

Author Response

Dear colleague,

Thank you for reading and reviewing our manuscript on ‘Administrative Costs and Tariff Rates in the presence of Customs Evasion: evidence from Ecuador’. We appreciate your suggestions and we use your advice and suggestions to improve our manuscript.

Comment 1

• Please do no combine references in endnotes, web pages in text, and in the section References. The references on data sources should be included in References ie.g. endnote 1)

Response

All references to data sources (web pages) were inserted in endnotes.

Comment 2 and 3

• English needs substantial corrections: „ However, the boom in 25 international trade affected by the lack of agreement in the Doha Round of trade negotiations and 26 mainly by the financial recession of 2008, so there has talked about a change of era.“ In the second clause the subject is missing.
• However, at the time of establishing protectionist measures, does it 30 carefully to analyze whether the allocation of monetary resources to enforce the law affects 31 administrative efficiencies? Word choice.

Response

We found your comments substantial and helpful. On this basis, the introduction has been revised completely. We provide more details on the topic of study to better define the Ecuadorian context. We then present the problem, explain the purpose and objectives of the project. Additionally, we explain the purpose of comparing the case from Ecuador and Chile.

Comment 4   

• Its tariff rate, most-favored-nation, simple mean. Unclear, what most favorite nation means.

Response

We added a definition (footnote 4) as the following:

The simple average of MFN applied duties is the simple average of Most Favored Nation (MFN) applied duties. The ‘Most Favored Nation’ is the highest (most restrictive) tariffs that members of the WTO charge one another unless the country is part of a preferential trade agreement.

Comment 5

• The variables in equation 1 should be explained more clearly. What is a simple average of „MFN applied duties“? the average across what? The other variables are also not clear. Why the authors choose the particular functions and the ratios they state in equation 1?

Response

In answer to your question, the simple mean most favored nation tariff rate is the unweighted average of most favored nation rates for all products subject to tariffs calculated for all traded goods.

Regarding the model specified in Equation (1), some explanations were added to justify the enter variables of this equation (188 to 255).  Following Agha and Haughton (1996) and Engel et al. (2001), we propose a simple model that shows how the cost of collection (a measure of efficiency/effectiveness) can be used to estimate the impact in customs evasion. Where it is expected that the evasion rate ‘e’ will increase with high tariff rates ‘τ’ and decrease with the highest level of spending ‘S/R’. 

Comment 6 

• For the equation Log (1-e) t = α + β log (S/R) t – ? log (τ) t + δ log (PIB/PIB-1) t + at

Why there is – before ?? Is not ? the coefficient you want to estimate including the sign?

Response

Thank you. It is a typing error. It was changed.

Comment 7

• ‘I’ corresponds to the declared value of imports reported by Ecuador and ‘E’ corresponds to the 156 exports reported by Ecuador's trading partners (mirror imports) at one time.” I did not find I or E in the equation. Supposedly it should have been (1-e)?

Response

Yes, it was unclear; more explanation was added to clarify. The changes are marked in red in the draft paper (213 - 230)

 Comment 8

• “The export-related information ‘E’ has obtained from the Trade Map Database, developed by the 161 International Trade Centre (ITC) in cooperation with the United Nations Conference on Trade and 162 Development (UNCTAD) and the World Trade Organization (WTO). The tool is freely accessible and 163 is available at the following electronic link trademap.org”. Please include the reference in the list of references. Add the date of access to the WEB page. Similar holds for “Therefore, in order to avoid errors and achieve the greatest possible 166 coincidence of import and export flows, the foreign trade database of the Ecuadorian Central Bank 167 https://www.bce.fin.ec/index.php/component/k2/item/762-sector-externo will be used, which 168 presents information on the FOB value of imports made ‘I’ by Ecuador.”

Response:  Changed.

Comment 9:   

• “When the equation for model 1 fit to the data, the result is: 226 Log (1-e) = - 0.03723 log (S/R) - 0.15756 log (τ) + 2.26551 (PIB/PIB-1) + (0.04907 /1-L) I 2016q2 +0.05480 I 2014q3 - 0.06221 I 2008q3 + 0.06142 I 2009q4 - 0.05475 I 2015q1 - 0.04908 I 2007q3 - 0.04198 I 2011q2 - 0.03826 I 2013q2 - 0.03504 I 2008q1 + (1/ 1-0.71136 L) at”. This equation needs to be numbered and explained. What is 1-L, q1, q2, ….?

Response

We have followed your recommendations. Please review section 3 ‘Methodology and Data’; we hope that this has clarified the situation.

Comment 10

• The correlations between the estimated parameters are 240 small and the residues are random” You meant autocorrelations?

Response

It was tried to be improved. We provide a more specific detail in the manuscript (330-339). We hope that it will be good enough.

Comment 11

• More discussion should be added about the situation with willingness to pay custom and tax is in Equador (and Chile? You mention in in the paper but not in the title).

Response

Correct, this explanation was added to the introduction. On the other hand, we believe it is appropriate that the title only refers to Ecuador. It is a case study based on the Ecuadorian experience. The Chilean case is used to provide a contrasting approach with another country of the region.

Author Response File: Author Response.pdf

Reviewer 2 Report

Thank you for rewieving possibility an interesting paper entitled "Administrative Costs and Tariff Rates in the presence of Customs Evasion: evidence from Ecuador".

I have few suggestions that could improve the paper

I can't find the footnotes to numbers 1 - 4 in Introduction chapter. Introduction should contain literature review and goal of the paper based on previous studies. I suggest to add more references in this part and connect the goal with them.

All figures should be translated to english. There many figures and tables but they have been poorly analyzed. The analysis should be extended.

Conclusion chapter contains few interesting conclusions. Economies is an international Journal, so I suggest to state stronger how this research method could be used in other countries (In my opinion it could). I suggest to add some discussion part in this chapter and chnge the name to Discussion and conclusion.

good luck with your paper!

Author Response

Dear Colleague,

Thank you for reading and reviewing our manuscript on ‘Administrative Costs and Tariff Rates in the presence of Customs Evasion: evidence from Ecuador’. We appreciate your advice and suggestions and we use this information to improve our manuscript.

We tried our best to improve the manuscript and made some changes in the manuscript.

Comment 1

• I can't find the footnotes to numbers 1 - 4 in Introduction chapter. Introduction should contain literature review and goal of the paper based on previous studies. I suggest to add more references in this part and connect the goal with them.

Response

Thank you very much for these suggestions. We also agree with you. That is why the introduction has been revised completely. We provide more details on the topic of study to better define the Ecuadorian context. We then present the problem, explain the purpose and objectives of the project. Additionally, we explain the purpose of comparing the case from Ecuador and Chile. The literature review can be found in section 2 “Related Literature”.

Comment 2

• All figures should be translated to English. There many figures and tables but they have been poorly analyzed. The analysis should be extended.

Response

We agree, so some explanations were added about the validation and diagnosis of the model. We have now changed the phrasing patterns from Spanish to English in all figures. We apologize for this oversight when we originally submitted the manuscript.

Comment 3

• Conclusion chapter contains few interesting conclusions. Economies is an international Journal, so I suggest to state stronger how this research method could be used in other countries (In my opinion it could). I suggest to add some discussion part in this chapter and change the name to Discussion and conclusion.

Response

Thank you for this observation. Some additional ideas were added to the conclusion to give more discussion on the results. In addition, we have restructured the sections of the article as follows:

1. Introduction
2. Related Literature
3. Methodology and Data
4. Results and Discussion

4.1 Ecuador Case Study

4.2 Chile Case Study

5. Conclusions

Author Response File: Author Response.pdf

Reviewer 3 Report

Dear authors,

Thank you for this interesting paper. I find the topic very important and I appreciate your good work on the paper. I find the subject and methodology of the paper very relevant and the paper is well structured. 

Indeed, I find your conclusion very interesting: "In the case of Ecuador, it would be advisable to establish a tariff policy based on a reduction in the levels of tariff rates in order to decrease evasion levels. It would bring as a benefit an improvement voluntary compliance with tax obligations. In short, allocating greater monetary resources to combat fraud does not always help reduce customs evasion. It will depend on the efficiency of the administrative cost of customs duties, the level of the tariff rate and the economic cycle that a country faces."

This is the most important finding of the paper and you need to present this in the beginning of the paper in criticism of the major literature in the field suggestion something else, if this is the case. So I would like you to improve the following: 

• literature review about the texts/articles that deal with your main topic in the conclusion.
• Self-criticism and more discussion of your conclusion. It is really a very ideological thesis that more money for administration does not solve the problem of tax evasion. Could you put some more words to this ideological discussion in the introduction and in the end of the paper. 
• Could you say more about how you define both tax/evasion and the idea of foreign companies not paying tax.
• Could you tell a bit more about your definition of administrative costs. maybe it is not the costs as such but much more the definition of administration and administrative costs that defines the outcome. 
• Could you develop the idea of how to deal with the problem of tax of foregn companies/investments in developing countries with limited statehood. I think that you do not really justify your conclusion since the problem may be that there is limited statehood and therefore administration is inefficient and administrative costs are high.

Good luck with your work. 

Author Response

Dear Colleague,

Thank you for reading and reviewing our manuscript on ‘Administrative Costs and Tariff Rates in the presence of Customs Evasion: evidence from Ecuador’. We appreciate your advice and suggestions and we use this information to improve our manuscript.

We tried our best to improve the manuscript and made some changes in the manuscript.

Comment 1 and 2

• Thank you for this interesting paper. I find the topic very important and I appreciate your good work on the paper. I find the subject and methodology of the paper very relevant and the paper is well structured.

Indeed, I find your conclusion very interesting: "In the case of Ecuador, it would be advisable to establish a tariff policy based on a reduction in the levels of tariff rates in order to decrease evasion levels. It would bring as a benefit an improvement voluntary compliance with tax obligations. In short, allocating greater monetary resources to combat fraud does not always help reduce customs evasion. It will depend on the efficiency of the administrative cost of customs duties, the level of the tariff rate and the economic cycle that a country faces."

This is the most important finding of the paper and you need to present this in the beginning of the paper in criticism of the major literature in the field suggestion something else, if this is the case. So I would like you to improve the following:

Literature review about the texts/articles that deal with your main topic in the conclusion.

• Self-criticism and more discussion of your conclusion. It is really a very ideological thesis that more money for administration does not solve the problem of tax evasion. Could you put some more words to this ideological discussion in the introduction and in the end of the paper.

Response

Thank you for your assessment and suggestions. We agree with you. The introduction has been revised completely. We provide more details on the topic of study to better define the Ecuadorian context. We then present the problem, explain the purpose and objectives of the project. Additionally, we explain the purpose of comparing the case from Ecuador and Chile.

Some additional ideas were added to the conclusion to give more discussion on the results. In addition, we have restructured the sections of the article as follows:

1. Introduction
2. Related Literature
3. Methodology and Data
4. Results and Discussion

4.1 Ecuador Case Study

4.2 Chile Case Study

5. Conclusions

Comment 3

• Could you say more about how you define both tax/evasion and the idea of foreign companies not paying tax.

 Response

 We are sorry but we did not understand your question. Please, could you expand it? We are not sure if you are referring to some activity that multinational companies carry out to avoid taxes, for example, in transfer pricing and customs value/tariff classification issues.

Comment 4

• Could you tell a bit more about your definition of administrative costs. maybe it is not the costs as such but much more the definition of administration and administrative costs that defines the outcome.

Response

Thank you for raising this issue; more explanation was added to clarify. The changes are marked in red in the draft paper (238 - 239)

Comment 5

• Could you develop the idea of how to deal with the problem of tax of foregn companies/investments in developing countries with limited statehood. I think that you do not really justify your conclusion since the problem may be that there is limited statehood and therefore administration is inefficient and administrative costs are high.

Response

This is an interesting idea, which requires examination. The limited statehood is broad in its application and conception.

The literature suggests tax compliance is determined by three broad factors (Walsh, 2012) [1]:

1. Economic Deterrence
2. Behavioral Economics

     2.1 Personal and Social Norms

     2.2 Fairness and trust in the tax administration

     2.3 Complexity of the Tax System

3. Role of the Government and the broader economic environment

In our view, Ecuador resorted to the use of economic deterrents, ignoring issues of behavioral economics and the role of government and the country's economic environment. For example, Ecuador's respect for the rule of law and corruption control is lagging behind other countries in the region according to the World Bank Governance Indicators.

We believe that the case of Ecuador shows that the use of coercive measures tends to be costly and unsustainable over time, which is why it is convenient to work on aspects of behavioral economics with an adequate formulation of trade policies.

[1] WALSH, K. (2012). Understanding Taxpayer Behaviour – New Opportunities for Tax Administration. The Economic and Social Review, 43(3), 451–475.

Author Response File: Author Response.pdf

Round 2

Reviewer 1 Report

Dear authors

Thank you for submitting another version. The comments a listed below.

The introductory part needs to be rewritten. Currently the introduction overuses bulleted lists. The authors need to reformulate introduction to avoid that.

Please limit the use of endnotes to the unavoidable cases. Do not use endnotes as a form to refer to the literature of data sources.

The table on the line 304, 305, 353-354 is not named and does not have a number. Neither the authors refer to it in the text.

Line 402. Source:BC,BCE, DIPRES, ITC, SENAE is not clear.

Author Response

We wish to thank you for your constructive feedback in this second round of review. In this document, we try to address the issues raised in the best possible faith.

Comment 1: The introductory part needs to be rewritten. Currently the introduction overuses bulleted lists. The authors need to reformulate introduction to avoid that.

Response: We agree with this and your suggestion is provided on line 18 to 128 of the introduction to the manuscript.

Comment 2: Please limit the use of endnotes to the unavoidable cases. Do not use endnotes as a form to refer to the literature of data sources.

Response: Agree. We have accordingly revised the excessive use of endnotes. We have reduced the footnotes from 15 to 2 and these include only explanatory notes.

Comment 3: The table on the line 304, 305, 353-354 is not named and does not have a number. Neither the authors refer to it in the text.

Response:  Thank you for that observation. On this issue, we would like to mention the following: the table in line 304-305 and 353-354 form an integral part of the output shown in tables 3 and 5, respectively.

In the estimation and diagnostic checking stage, the econometric software uses just one output to, firstly, specify the ARIMA model and to estimate the parameters of that model. Secondly, this estimate statement also produces goodness-of-fit statistics to help you judge the adequacy of the Arima model. In general, when you are comparing candidate models, the goodness-of-fit statistics help to choose the better fitting model for the data. We are not comparing the better fitting Arimax models for the variables Ecuador or Chile case. That is why we do not refer to it in the text.

In addition, we have included a paragraph on line 314-317 to refer to the table of goodness-of-fit statistics. We believe it is not necessary to provide more detail because the good-fit statistics are well documented in the literature. We have also already provided bibliographic references in the manuscript to illustrate to the reader about the transfer function model. (Box et al., 2016 and Pérez, 2011)

Comment 4: Line 402. Source: BC, BCE, DIPRES, ITC, SENAE is not clear.

Response: Thank you for pointing this out. In this respect, we introduced the use of the whole word for each abbreviated term.

Author Response File: Author Response.pdf

Round 3

Reviewer 1 Report

Dear authors. Thank you for the new version of your paper. It is much better. The remaining comments are listed below:

The authors write „The dollarization of Ecuador’s economy 26showed the lack of diversification of production and exports. For example,Ecuador's trade balance 27prior to the dollarization of theeconomy(1990-1999) averaged US$ 791 million, while indollarization28(2000-2017) the trade balance was indeficit with an average of US$ -27 million(Ecuadorian Central 29Bank, 2018a). The oil trade balance has historically enjoyed a surplus, largely driven by high 30international oil prices. The non-oil trade balance, on the other hand, has a long and growing history 31of deficit (Figure 1).“

What is the relation of diversification and the trade balance? You mean diversification to oil and non-oil sectors? Not clear. Please reformulate

„To support the selective import substitution economic policy, a series of reforms and measures 36were necessary“

Selective import substitution economic policy was not mentioned before. Please introduce the concept.

„The creation and suppression of some trade policy-governing entities to provide a greater 38institutional framework for changing the production structure.“

The authors meant the creation of some and suppression of other entities? Or creation and suppression of the  same entities? Unclear, please reformulate.

„According to some researchers, the customs control policy is not sufficient; for every new control 92established at the border, smugglers devise five new unauthorized border crossings, (FLACSO, 2015).“ This is the main topic of your paper. Please explain more.

„Therefore, it is convenient to analyze the impact of public spending in circumstances where tariff 123levels arerestrictive.For this purpose, we will compare differentapproaches. We focus on the Chilean 124case study for the following reasons: Chile is a Latin American country with easy accessto 125highquality official information, which allows for theconstruction of an adequate time series of data. 126In addition, the case of Chile (free trade) contrasts with that of Ecuador (protectionism) in terms of 127trade policy.“

I am perplexed I thought the paper is about Equador. Now I learn that i tis about Chile. I tried to find in the methods and data section whether your data are  from Chile or from Equador, and did not succeed. I just found that „‘I’ corresponds to the declared value of imports reported by Ecuador and ‘E’ corresponds to the 229exports reported by Ecuador's trading partners (mirror imports)2at one time.“ What about other data you use? Please specify. What is the source of the data for Chile case?

„The Administrative costs ‘S’ are the costs incurred by the Ecuadorian Customs in order to 250administer the tax system(government’s current, capitaland investmentspending)“ you might want to plot the graph of this variable to show the increase.

„In this regard, note the difference between equations (2) and (3)corresponding to the cases of 469Ecuador and Chile, respectively; the output of the model in equation (2)suggests that an increase in 470the tariff rate will lead to a decrease in tax compliance. Equation (3)shows the opposite effect, that is, 471an increase in the tariff rate would not affect tax compliance. This empirical finding shows that tax 472levels in Ecuador are not at an optimal point (Laffer curve-saturation point).“ Can you find other explanation for this phenomena except the Laffer curve? Corruption? Clientelism? Not working law enforcement? Other?

Author Response

Thank you for these supplementary questions. We have the following comments:                     

Comment 1

The authors write “The dollarization of Ecuador’s economy showed the lack of diversification of production and exports. For example, Ecuador's trade balance prior to the dollarization of the economy (1990-1999) averaged US$ 791 million, while indollarization (2000-2017) the trade balance was indeficit with an average of US$ -27 million(Ecuadorian Central 29Bank, 2018a). The oil trade balance has historically enjoyed a surplus, largely driven by high international oil prices. The non-oil trade balance, on the other hand, has a long and growing history of deficit (Figure 1)“

What is the relation of diversification and the trade balance? You mean diversification to oil and non-oil sectors? Not clear. Please reformulate.

 Response

We are sorry, but we did not understand your questions.

• You are asking, what is the relationship between export diversification and the trade balance? Export diversification, by definition, is the changing of a country's export structure. For their part, trade balance refers to the difference between the monetary value of a country’s imports and exports over a given time. Export diversification has long been a policy concern for Ecuador and other developing countries because it can lead to higher growth.
• Why do you ask if we want to diversify the oil or non-oil sectors? Do you think that export diversification away from primary commodities cannot help in maintaining stability in export receipts and contributing to economic growth?

Please, we need further clarification.

Comment 2

“To support the selective import substitution economic policy, a series of reforms and measures were necessary“

Selective import substitution economic policy was not mentioned before. Please introduce the concept.

Response

Sorry, we do not fully share your commentary. The term “Selective import substitution economic policy” and its objectives are described on line 18. 

We believe that the term “import substitution” is a well-developed concept in the economic literature; nevertheless, we introduced a short explanation about it on line 18

Comment 3

“The creation and suppression of some trade policy-governing entities to provide a greater institutional framework for changing the production structure”

The authors meant the creation of some and suppression of other entities? Or creation and suppression of the same entities? Unclear, please reformulate.

Response

Agree. We changed it. Please, see line 38 and 39.

Comment 4

“According to some researchers, the customs control policy is not sufficient; for every new control established at the border, smugglers devise five new unauthorized border crossings, (FLACSO, 2015)” This is the main topic of your paper. Please explain more.

 Response

Are you saying that the information about customs control is not complete? We do not have the same opinion as you because we describe these facts in the document (lines 78 to 121), e.g., increase in goods seizure, smuggling figures, activities to mitigate the effects of the import substitution policy, etc. Additionally, the document contains a large number of references for further reading.

Please tell us why you did not find this helpful.

Comment 5

“Therefore, it is convenient to analyze the impact of public spending in circumstances where tariff levels are restrictive. For this purpose, we will compare different approaches. We focus on the Chilean case study for the following reasons: Chile is a Latin American country with easy access to high quality official information, which allows for the construction of an adequate time series of data. 126In addition, the case of Chile (free trade) contrasts with that of Ecuador (protectionism) in terms of trade policy”

I am perplexed I thought the paper is about Equador. Now I learn that i tis about Chile. I tried to find in the methods and data section whether your data are from Chile or from Equador, and did not succeed. I just found that „‘I’ corresponds to the declared value of imports reported by Ecuador and ‘E’ corresponds to the exports reported by Ecuador's trading partners (mirror imports) at one time“.  What about other data you use? Please specify. What is the source of the data for Chile case?

Response

We are somewhat surprised by your comments. This information has always been available on all the versions manuscript (first and second draft). Please check the source of data used for Chile on line 339, section 4.2 “Chile Case Study”.

Comment 6

“The Administrative costs ‘S’ are the costs incurred by the Ecuadorian Customs in order to administer the tax system (government’s current, capital and investment spending)“ you might want to plot the graph of this variable to show the increase.

 Response

That is right. Your suggestion is provided on line 99 to 104. We think that this may be the right place to post the graphic since in this section we are referring to this issue.

Comment 7

“In this regard, note the difference between equations (2) and (3) corresponding to the cases of Ecuador and Chile, respectively; the output of the model in equation (2) suggests that an increase in the tariff rate will lead to a decrease in tax compliance. Equation (3) shows the opposite effect, that is, an increase in the tariff rate would not affect tax compliance. This empirical finding shows that tax levels in Ecuador are not at an optimal point (Laffer curve-saturation point)” Can you find other explanation for this phenomena except the Laffer curve? Corruption? Clientelism? Not working law enforcement? Other?

Response

We think that the answer to your question is given in the construction of the model (equation 1). A distinction must be made between cause and effect.  Corruption, clientelism, not working law enforcement? This is still an effect, not the cause. In a democratic system, do you think that if it disappears, for example, corruption will increase the compliance rate when tariff levels reach levels higher than a taxpayer's ability to pay?

Author Response File: Author Response.pdf