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on Informal and Underground Economics |
| By: | Canta, Chiara (Toulouse Business School); Cremer, Helmuth (Toulouse School of Economics); Gahvari, Firouz (University of Illinois at Urbana-Champaign) |
| Abstract: | We study optimal income taxation in a framework where one's willingness to report his income truthfully is positively correlated with his type. We show that allowing low-productivity types to cheat leads to Pareto-superior outcomes as compared to deterring them, even if audits can be performed costlessly. When there is no cheating, redistribution takes place on first- and second-best frontiers and can never make low-ability types more well-off than high-ability types. Letting low-ability types cheat allows first-best redistribution up to a limit at which low-ability types are better off than high-ability types. |
| Keywords: | optimal taxation, tax evasion, audits, welfare-improving |
| JEL: | H20 H21 H26 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13483&r=all |
| By: | Natasha Sarin; Lawrence H. Summers |
| Abstract: | In a July 2020 report, the Congressional Budget Office estimated that modest investments in the IRS would generate somewhere between $60 and $100 billion in additional revenue over a decade. This is qualitatively correct. But quantitatively, the revenue potential is much more significant than the CBO report suggests. We highlight five reasons for the CBO’s underestimation: 1) the scale of the investment in the IRS contemplated is modest and far short of sufficient even to return the IRS budget to 2011 levels; 2) the CBO contemplates a limited range of interventions, excluding entirely progress on information reporting and technological advancements; 3) the estimates assume rapidly diminishing returns to marginal increases in investment; 4) the estimates leave out the effect of increased enforcement on taxpayer decision-making; and 5) the use of the 10-year window means that the long-run benefits of increased enforcement are excluded. We discuss these issues, present an alternative calculation, and conclude that a commitment to restoring tax compliance efforts to historical levels could generate over $1 trillion in the next decade. |
| JEL: | H0 H2 H22 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27571&r=all |
| By: | Shafik Hebous; Zhiyang Jia; Knut Løyland; Thor Olav Thoresen; Arnstein Øvrum |
| Abstract: | The Norwegian Tax Administration operated multi-year random audits of personal income tax returns. We exploit this exceptional randomized setup to estimate the effects of tax audits on future compliance explicitly distinguishing between dynamic responses of compliant and noncompliant audited taxpayers. A priori, the literature has suggested two competing effects: A post-audit deterrence effect—whereby audits prompt taxpayers to comply in subsequent years—or an “approval effect”—whereby audits lower taxpayers’ subjective probability of detecting future evasion and hence weaken compliance. Our results suggest improved future compliance for five post-audit years by those that were found noncompliant in the audits. Those that were found compliant, however, show no signs of behavioral adjustments. Although the findings are consistent with the deterrence effect, we argue that there is also a “learning” effect with the important implication that better information for taxpayers critically complements tax audits. |
| Keywords: | tax administration, tax evasion, tax compliance, tax audits, administrative data |
| JEL: | H26 C23 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8480&r=all |
| By: | Schmieder, Julia (DIW Berlin) |
| Abstract: | Based on findings from high-income countries, typically economists hypothesize that having more children unambiguously decreases the time mothers spend in the labor market. Few studies on lower-income countries, in which low household wealth, informal child care, and informal employment opportunities prevail, find mixed results. Using Mexican census data, I find a positive effect of an instrument-induced increase in fertility on maternal employment driven by an increase in informal work. The presence of grandparents and low wealth appear to be important. Econometric approaches that allow extrapolating from this complier-specific effect indicate that the response in informal employment is non-negative for the entire sample. |
| Keywords: | fertility, female labor supply, middle-income countries, informality |
| JEL: | J13 J16 J22 J46 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13496&r=all |
| By: | Bupe Simuchimba Author-Name: Frank Chansa Author-Name: Charles Banda Author-Name: Wapakulukwela Simuchimba Author-Name: Lulit Mitik Beyene |
| Abstract: | The number of women employed in the Zambian formal sector is small, which has likely played a role in the low level of women’s empowerment in the country. As a result, the government of Zambia is willing to adopt policies that can positively contribute to women’s formal employment. Based on this policy objective, we propose a wage-subsidy program that considers the best design in implementation and financing. To achieve our research objectives, we calibrated a Computable General Equilibrium (CGE) methodology to a gendered Social Accounting Matrix (SAM) that disaggregated labour into skills and type of employment. Our findings suggest that a wage-subsidy program that targeted women would increase their participation in the formal sector, potentially leading to an increase in household income as well as in women’s contribution to this income. Under our simulations, government revenue fell slightly when an appropriate financing option was applied, but potential benefits to the empowerment of women ultimately outweigh costs. Alternatively, to ensure that the most is obtained from a wage subsidy, corporate taxes could be raised to finance this program. The overall effect of this option would be an improvement in the performance of the economy as well as in household welfare. |
| Keywords: | Computable General Equilibrium, Women, Participation, Wage subsidy |
| JEL: | C68 J16 J22 J38 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:mpiacr:2020-14&r=all |
| By: | Lavinia Piemontese (Univ Lyon, ENS de Lyon, GATE UMR 5824, F-69342 Lyon, France) |
| Abstract: | This paper proposes a new approach for quantifying the economic cost of hidden economies. I specifically apply the method to the case of mafia racketeering in Northern Italy, and in so doing, provide the first explicit estimate of the economic cost of mafia spread in this area. I show both theoretically and empirically that acts of extortion imposed on certain firms are linked to resource misallocation. I quantify the share of output that the mafia extorts from firms, which ranges between 0.5 and 5 percent of firm-level output for the taxed firms. I then consider what these estimates imply and find that between 2000 and 2012, the Northern Italian economy suffered an aggregate loss of approximately 2.5 billion Euros. Quite remarkably, only one-fourth of this cost consists of the aggregate transfer to the mafia. The remaining three-fourths corresponds to the contraction of production due to misallocation. |
| Keywords: | Organized crime, Extortion Racketeering, Resource Misallocation, Welfare Loss, within-industry OP covariance |
| JEL: | K42 O17 D61 O4 C5 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:2025&r=all |
| By: | Djossou Gbetoton Nadege Author-Name: Jacob Novignon Author-Name: Atchade Touwédé Bénédicte Author-Name: Abdelkrim Araar |
| Abstract: | Young entrepreneurship is an important lever for economic growth and employment creation in developing countries. Credit uptake, however, continues to pose significant limitations to the sustainability of small-scale enterprises. We estimated the impact of credit uptake (formal, informal, and family) on young entrepreneurship performance in Benin, using 2014-2016 panel data from a World Bank survey on enterprise formalization. To address potential endogeneity and ensure robustness of results, we employed multiple models and estimation techniques (fixed-effects and Lewbel approach). Our results showed that, while formal credit was most important for larger firms, smaller firms benefited mainly from flexible (informal or family) credit. The impact of credit uptake was generally higher for women-owned firms. There were also variations in uptake according to firm owner’s age: the impact of formal credit was relatively higher for older firm owners while younger owners benefited more from flexible credit. The findings highlight the importance of Informal and family credit sources, especially for start-ups and small firms. |
| Keywords: | Youth Entrepreneurship, Microcredit, Small-scale Enterprises, Benin |
| JEL: | D20 O12 O17 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:pmmacr:2020-16&r=all |