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on Informal and Underground Economics |
| By: | Justin E. Holz; Ricardo Perez-Truglia; Alejandro Zentner |
| Abstract: | The wealthiest individuals frequently engage in tax avoidance, and public awareness of this behavior is growing. Such awareness may undermine tax compliance among the broader population, either by revealing strategies others can emulate or by shifting social norms to make avoidance seem more acceptable. We first document that individuals are less tolerant of both tax avoidance and tax evasion when carried out by the wealthiest households. We next present results from a field experiment on property tax appeals, which—like other forms of tax avoidance—is used disproportionately by the wealthiest households. Providing information about the appeal rates of the richest-1% of households increased individuals' perceptions of unfairness, but did not affect their own appeal decisions—measured via administrative records—or even their expected tax savings. Information about the prevalence of appeals among comparable households also had no effect. By contrast, information about the expected financial gains from appealing had a significant effect on appeal choices. In sum, while the public condemns tax avoidance by the wealthiest households, we find no sign that such behavior encourages similar actions among the broader population. |
| JEL: | C9 H26 Z13 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34209 |
| By: | Natalia Jiménez-Jiménez (Universidad Pablo de Olavide); Elena Molis-Bañales (Universidad de Granada); Ángel Solano-García (Universidad de Granada) |
| Abstract: | In this paper, we analyze theoretically and experimentally the relationship of tax avoidance and voting decisions over the size of taxation. We propose a basic model of redistributive politics in which there are two types of voters (skilled and unskilled workers) and two exogenous tax schemes to vote for. We design a laboratory experiment to test the results of the model. We consider a control treatment where tax avoidance is not feasible. In the main treatments, only the high skilled workers are allowed to avoid taxes with a fixed cost that varies in two different treatments. We also consider two additional treatments with explicit or implicit information about tax avoidance decisions. The impossibility of tax avoidance favors the support for the high tax rate. A sufficiently high cost of tax avoidance makes unskilled workers vote mostly for a low tax rate and skilled workers opt for almost no tax avoidance. Nevertheless, if tax avoidance is cheap enough, a higher than predicted proportion of unskilled workers still vote for the low tax rate, even in a high tax avoidance context. The only effect of information occurs when the cost of tax avoidance is low, and it entails a decrease in tax avoidance levels. Finally, regardless the tax avoidance cost, a higher rate of tax avoidance yields to a higher likelihood of unskilled workers voting for the high tax rate, and, vice versa, a higher probability of voting for the high tax rate results in a higher tax avoidance level. |
| Keywords: | tax avoidance; voting; income inequality; real-effort task; information. |
| JEL: | C92 D72 H26 H30 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pab:wpaper:25.07 |
| By: | Natalia Jiménez-Jiménez (Universidad Pablo de Olavide); Elena Molis-Bañales (Universidad de Granada); Ángel Solano-García (Universidad de Granada) |
| Abstract: | This paper examines how voters choose both the tax rate and the level of tax avoidance in different societies, considering luck versus merit as the source of pre-tax income inequality. We propose a laboratory experiment based on the redistributive politics and labor market model by Jiménez-Jiménez et al. (2025). In this model, skilled and unskilled workers decide, by majority voting, between two tax schemes (low and high), with only skilled workers able to avoid taxes. Our experimental design includes four treatments that vary the cost of tax avoidance and the source of initial pre-tax income inequality, with the role of skilled or unskilled workers determined either through a tournament or randomly. Our findings suggest that in economies where tax avoidance is easy, luck as the source of pre-tax income inequality leads individuals to behave more frequently as in the theoretical equilibrium in which the high tax rate is implemented, and skilled workers avoid taxes. Conversely, in economies with a high cost of tax avoidance, meritocracy reinforces the theoretical equilibrium characterized by a higher frequency of votes for the low tax rate and lower levels of tax avoidance. Notably, meritocracy appears to improve income inequality when the cost of tax avoidance is high, but it harms income inequality when that cost is low. |
| Keywords: | tax avoidance; meritocracy; voting; income inequality; real-effort task. |
| JEL: | C92 D72 H26 H30 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pab:wpaper:25.05 |
| By: | Artuc, Erhan; Falcone, Guillermo Enrique; Porto, Guido; Rijkers, Bob |
| Abstract: | This paper analyzes the welfare impacts of import bans in Nigeria, and how these are shaped by evasion. Bans were not effectively enforced, and contributed to informal trade. The imposition of bans nonetheless increased consumer prices by 5.8% on average. However, price increases are substantially attenuated for goods for which trade policy is harder to enforce. Import bans disproportionately hurt the rich: the benefits of evasion are regressive. |
| Date: | 2025–09–02 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11195 |
| By: | Dominika Langenmayr (KU Eichstätt-Ingolstadt, WU Vienna, CESifo); Mikayel Tovmasyan (KU Eichstätt-Ingolstadt); Sebastian Vosseler (KU Eichstätt-Ingolstadt) |
| Abstract: | Are sanctions bypassed by hiding money offshore? Using bilateral data on bank deposits, we compare how offshore deposits from sanctioned versus non-sanctioned countries develop after the U.S. and the EU impose financial sanctions. Sanctions targeting individuals increase offshore deposits, as (potential) targets attempt to hide their funds. Broader financial sanctions reduce offshore (and other foreign) deposits, as money is repatriated. A synthetic control case study of Russia following the annexation of Crimea confirms our main findings, showing a 15% post-sanction increase in offshore deposits. These findings highlight the limits of symbolic sanctions and the need for secondary sanctions and financial surveillance. |
| Keywords: | Sanctions; tax havens; illicit financial flows |
| JEL: | F51 H12 K42 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:drx:wpaper:202536 |
| By: | Bachas, Pierre; Brockmeyer, Anne; Ferreira, Alipio; Sarr, Bassirou |
| Abstract: | Can algorithms enhance bureaucrats’ work in developing countries? In data-poor environments, bureaucrats often exercise discretion over key decisions, such as audit selection. Exploiting newly digitized micro-data, this study conducted an at-scale field experiment whereby half of Senegal’s annual audit program was selected by tax inspectors and the other half by a transparent risk-scoring algorithm. The algorithm-selected audits were 18 percentage points less likely to be conducted, detected 89% less evasion, were less cost-effective, and did not reduce corruption. Moreover, even a machine-learning algorithm would only have moderately raised detected evasion. These results are consistent with bureaucrats’ expertise, the task complexity, and inherent data limitations. |
| Date: | 2025–09–05 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11205 |
| By: | Edoardo Di Porto; Pietro Garibaldi; Giovanni Mastrobuoni; Paolo Naticchioni |
| Abstract: | Flexible work arrangements (FWAs) are often promoted as a means to regularise informal labour. Utilising unique Italian administrative data that links employer-employee records, daily voucher usage by firms, and randomly timed labour inspections (2014-2017), we demonstrate that FWAs can also hinder enforcement and increase undeclared work. We document that, upon inspection, some firms validate undeclared work with FWAs on the spot, raising the probability of FWA usage by 0.88 percentage points (18%) on average, with the largest increases occurring on the day of and the day after the inspection. A simple partial-equilibrium labour-demand model with heterogeneous tax morale rationalises these “on-the-spot” validations as an enforcement-avoidance margin. The post-inspection increase vanishes when firms are required to pre-notify the tax authority of their use of FWAs. Moreover, when FWAs are completely abolished, presumptive misusers substitute FWAs with temporary contracts. |
| Keywords: | informality, labour vouchers, flexible work arrangements, occasional work, zero-hour contracts |
| JEL: | J23 H26 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12115 |
| By: | Aristizábal-Ramírez, María; Santos, Cezar; Torres, Alejandra |
| Abstract: | This paper examines labor markets across Latin American countries and documents large differences in labor market outcomes across these countries. Using comparable data for eight countries, we show that unemployment and informality act as substitute states and cluster countries into high-unemployment or high-informality groups. Labor market transitions vary systematically across these groups and help explain differences in employment dynamics. Embedding country-specific transitions in a simple model, we show that these differences have meaningful macroeconomic implications: countries with more volatile labor markets exhibit higher asset accumulation and greater consumption inequality. Moreover, heterogeneity in labor market transitions produces different effects on how taxation influences savings and inequality. |
| Keywords: | Labor markets;Informality;Unemployment;Transitions |
| JEL: | E24 E26 J46 O54 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14256 |
| By: | Ambler, Kate; Balana, Bedru; Bloem, Jeffrey R.; Maruyama, Eduardo; Olanrewaju, Opeyemi |
| Abstract: | Access to credit can be important for improving the performance of smallholders, as it enables farmers to purchase inputs while sustaining their livelihoods. In rural Nigeria, however, access to credit—particularly from formal financial institutions—is limited. As a result, farmers often have little to no choice but to depend on alternative credit sources, including informal lending. Small holder agricultural households often turn to friends and family, or local money lenders and other informal and semi-formal sources to meet their credit needs (EFInA, 2020). |
| Keywords: | access to finance; credit; smallholders; inputs; repayment of debts; Nigeria; Africa; Western Africa; Sub-Saharan Africa |
| Date: | 2025–07–14 |
| URL: | https://d.repec.org/n?u=RePEc:fpr:prnote:175654 |