nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2011‒07‒13
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Evaluation of firms dissimulated activity based on fiscal audits and integration in national accounts By C. LOUVOT-RUNAVOT
  2. Macroeconomic Implications of the Underground Sector: Challenging the Double Business Cycle Approach By Catalina Granda-Carvajal
  3. Endogenous Norm Formation over the Life Cycle. The case of tax evasion By Nordblom, Katarina; Zamac, Jovan
  4. Social Protection Programs and Employment: The Case of Mexico's Seguro Popular Program By Raymundo M. Campos-Vazquez; Melissa A. Knox
  5. Taxes, Transfers and the Distribution of Employment in Mexico By Alonso Ortiz, Jorge; Leal Ordóñez, Julio C.
  6. Self-Employment of Rural-to-Urban Migrants in China By Giulietti, Corrado; Ning, Guangjie; Zimmermann, Klaus F.
  7. Firm Registration and Bribes: Results from a Microenterprise Survey in Africa By Clarke, George R.G.
  8. Corruption and Network in Education: Evidence from the Household Survey Data in Bangladesh By Chongwoo Choe; Ratbek Dzhumashev; Asadul Islam; Zakir H. Khan
  9. Top tax system: a common taxation system for all nations By Varma, Vijaya Krushna Varma

  1. By: C. LOUVOT-RUNAVOT (Insee)
    Abstract: The measurement of the hidden economy is necessary to ensure exhaustiveness of Gross Domestic Product and thus be able to conduct comparisons between countries. The part of firms activity that is not declared to tax authorities inevitably evades statistical observation. In France, it is possible to evaluate this hidden activity by means of fiscal audits, during which concealed profits may be unveiled. By incorporating a fiscal audit sample into a survey, this type of fraud can then be extrapolated to the whole field. For every category of taxpayer, inclusion probabilities have been estimated with logistic models, making use of categorical predictor variables, like size or activity sector. The more significant of those variables have been used next to define a post-stratification upon which is based the macroeconomic evaluation of the dissimulated aggregates. This extrapolation method takes into account the overrepresentation of the firms that are supposed to conceal the biggest amounts of taxes. In particular, financial indicators have been introduced in the stratification to improve the modeling of this overrepresentation and they lead to a marked decrease in the estimation of the hidden production. The aim was to rectify National Accounts output and value-added. Among the fiscal rectifications, only those that dealt with the real flows of the firms book-keeping were taken into account. Moreover, when the available rectifications were concerned with taxes, it was necessary to go back to the corresponding taxable amount. This procedure is the main weakness of the fiscal information processing. Applied to 2006 turnover, the fraud rates finally obtained led to a 40 billion euro rise in the level of national value-added, that is to say a 2.2 % adjustment of GDP.
    Keywords: Dissimulated activity, fiscal audit, logistic regression, post-stratification, correction (rectification), National Accounts
    JEL: E26 C25 C81 E01
    Date: 2011
  2. By: Catalina Granda-Carvajal (University of Connecticut and Universidad de Antioquia)
    Abstract: Within the literature on business cycles featuring shadow economic activities, there is an approach based on the arguable premise that fluctuations in the official and unofficial sectors are negatively correlated. The present paper develops a real business cycle model that does not impose such an assumption. To do so, preferences are characterized so that regular and irregular labor are additively separable. Furthermore, leisure time is spent on both irregular work effort and non-market activities. Simulations are conducted to examine the performance of the model economy and to compare the resulting cyclical features with related empirical findings. In addition, computational experiments allow to analyze the effects of different tax structures, enforcement rates and tastes for irregular labor on the volatility and comovements of aggregate variables. These simulations and experiments overall offer a more comprehensive view of the cyclical implications of the shadow economy.
    Keywords: Underground economy, shadow economy, business cycles, dynamic stochastic general equilibrium models
    JEL: E26 E32 H26 O17
    Date: 2011–07
  3. By: Nordblom, Katarina (Department of Economics, School of Business, Economics and Law, Göteborg University); Zamac, Jovan (Dept of Economics, Uppsala University)
    Abstract: This paper offers an explanation to why the general observation that elderly hold stronger moral attitudes than young ones may be an age rather than a cohort effect. We apply mechanisms from social psychology to explain how personal norms may evolve over the life cycle. We assume that people update their norms influenced by their own past behavior (e.g., cognitive dissonance) and/or by the attitudes of their peers (normative conformity). We apply the theory on actual norm distributions for young and old concerning tax evasion. Allowing for heterogeneous updating of norms where only those who identify with their network are actually conforming with it, while the others are only influenced by their own past behavior, we can explain the difference between young and old people’s moral values as an age effect through endogenous norm formation.
    Keywords: Social norms; Endogenous norms; Tax evasion; Cognitive dissonance; Self-signaling; Normative conformity
    JEL: H26
    Date: 2011–07–01
  4. By: Raymundo M. Campos-Vazquez; Melissa A. Knox
  5. By: Alonso Ortiz, Jorge; Leal Ordóñez, Julio C.
    Abstract: The informal sector accounts for a substantial fraction of employed population in Mexico and other Latin American countries. In this paper we study the interaction between the tax and transfers system and the size and composition of informal sector. To do that we build a search model that can be calibrated to the Mexican data. Our model features two employment statuses: employed and unemployed; and two sectors: formal and informal. We estimate our model to data from Encuesta Nacional de Ocupaci ́on y empleo (ENOE) by simulated GMM. Then we perform three different policy analyses: changes in the distribution of the transfers between formal and informal sector workers, changes in the size of the transfer system, and changes in the progressivity of taxes and transfers (pending). Our model is able to capture key features of Mexican labor markets, such as the distribution of the labor force across sectors and the distribution of accepted wage offers. Dividing transfers equally between formal and informal sector workers increases the size of the informal sector by 5 percentage points, it also increases average wages in the formal sector by 6% whereas wages in the informal sector fall by 4%. When we double the size of transfers, the size of informal sector falls by 5 percentage points. However, it has a big effect on the distribution of accepted wage offers: average wages increase by 10% in the formal sector and they raise by 16% in the informal sector.
    Keywords: Informal Sector; Mexico; Taxes; Transfers; General Equilibrium; Frictions
    JEL: E62 E24 J31 J21 H30 H53
    Date: 2011–07–04
  6. By: Giulietti, Corrado (IZA); Ning, Guangjie (Nankai University); Zimmermann, Klaus F. (IZA and University of Bonn)
    Abstract: This paper focuses on the determinants of self-employment among rural to urban migrants in China. Two self-selection mechanisms are analysed: the first relates to the manner in which migrants choose self-employment or paid work based on the potential gains from either type of employment; the second takes into account that the determinants of the migration decision can be correlated with employment choices. Using data from the 2008 Rural-Urban Migration in China and Indonesia (RUMiCI) survey, a selection model with endogenous switching is estimated. Earnings estimates are then used to derive the wage differential, which in turn is used to model the employment choice. The procedure is extended to account for migration selectivity and to compare individuals with different migration background and employment histories. The results indicate that self-employed individuals are positively selected with respect to their unobserved characteristics. Furthermore, the wage differential is found to be an important driver of the self-employment choice.
    Keywords: self-employment, wages, rural to urban migration, selection bias magnets, European Union
    JEL: J23 J61 O15
    Date: 2011–06
  7. By: Clarke, George R.G.
    Abstract: If corrupt bureaucrats target registered firms, then corruption may discourage registration. Using data from a survey of 4,801 microenterprises in Zambia, this paper looks at whether corruption is a more or less serious problem for registered firms. The paper finds results consistent with the cross-country evidence—registered firms appear to be more concerned about corruption than unregistered firms. This suggests that remaining informal and out-of-sight might reduce the burden of corruption. The paper also looks at two possible reasons why registered firms might be more concerned about corruption. It finds that there is little evidence that government officials specifically target registered firms. Registered firms were more likely to be involved in transactions with government or parastatal officials that could involve bribes—possibly explaining why they are more concerned about corruption than other firms are—but they were no more likely to pay bribes during these transactions.
    Keywords: Zambia; Africa; Corruption; Petty Corruption; Informality; Bribes; Registration
    JEL: D73 O17 E26
    Date: 2011–06–25
  8. By: Chongwoo Choe; Ratbek Dzhumashev; Asadul Islam; Zakir H. Khan
    Abstract: We examine the causes and consequences of corruption in the provision of education service in Bangladesh. Our empirical analysis is based on the 2007 household survey data collected by Transparency International Bangladesh (TIB), which measure actual corruption. Our main findings are (i) both the incidence of corruption and the amount of bribe increase in the level of red tape, (ii) poorer households, households with less educated household head, and households with girls studying in school are more likely to be victims of corruption, (iii) households with higher social status are more likely to rely on informal network to bypass the red tape or pay less amount of bribe and, as a result, (iv) corruption in the education sector is likely to be regressive.
    Keywords: education, corruption, bribery, Bangladesh
    JEL: K4 O1
    Date: 2011–06
  9. By: Varma, Vijaya Krushna Varma
    Abstract: I am suggesting new methods, and innovative and alternative policies in the areas of optimal taxation, tax collection, money supply and banking financial system to help remove corruption, tax evasion, economic recession, black money, fake currency and societal inequalities. In my opinion, the proposed TOP Tax system may usher in good governance, 100% tax compliance and corruption free environment. It suggests a single tax called “TOP Tax” (Transfer Or Purchase Tax) for both Centre and States combined in place of present multiple Indirect taxes with different slab rates on different goods/commodities/services and multiple Direct taxes with different slab rates, relieving people from the cobweb of ambiguous and complex tax structures, plethora of tax laws, mandatory and cumbersome accounting, auditing, tax returns and consequent quagmire of all tax related cases. Therefore the numerous tax exemptions and exclusions, which have invariably narrowed the tax base, will no longer be needed. This new TOP Tax system with only single tax (TOP Tax) envisages 20 to 30 % more revenues than presently accruing from multiple taxes collected by different departments/agencies. The availability of resources and capital flows, needed for economic recovery, is the self-priming character of the “TOP Tax system” without Government’s fiscal stimulus packages. This new taxation shall be operated at minimum operating cost with limited paper currency, thereby totally eliminating fake currency, black money, tax evasion, corruption and extortions. Under this new taxation system the tax net will be the broadest with absolutely no tax evasion, making it possible for the lowest tax slab rate and cheapest prices of commodities/services. The redistribution of revenues from Government to people in the form of welfare schemes, subsidies and various relief funds will become easier without leakages, bribes and misappropriation. Although this new taxation system is a basic model suggested mainly for India, the basic concept of taxation and tax collection methods can be adopted and implemented by all the developed and developing countries alike to benefit 6.5 billion people of the world in all spheres of their lives in one form or other.
    Keywords: Single tax system; A new taxation system; Redefining the role of banking sector; optimal taxation; tax collection; money supply; lowest interest rates; Economy that will run on limited paper currency and dematerialised money
    JEL: E62 E43 E51 H24 H2 H71 H63 H21 H25 E52 E40 H61 H26 G21
    Date: 2009–05–31

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