nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2011‒10‒09
eight papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Enforcement of labor regulation and informality By Rita Almeida; Pedro Carneiro
  2. Regulation, governance and informality: an empirical analysis of selected countries By Roychowdhury, Punarjit; Dutta, Mousumi
  3. Do Cheaters Bunch Together? Profit Taxes, Withholding Rates and Tax Evasion By Paul E. Carrillo; M. Shahe Emran; Anita Rivadeneira
  4. Discretionary policy, strategic complementarity and tax evasion. A strategic analysis of the Italian audit mechanism By Bruno Chiarini; Simona Monteleone
  5. Taxes, Prisons, and CFOs: The Effects of Increased Punishment on Corporate Tax Compliance in Ecuador By Paul E. Carrillo; M. Shahe Emran; Gabriela Aparicio
  6. What Drives Corruption? Evidence from North African Firms By Clara Delavallade
  7. National measures to counter tax avoidance under the Merger Directive By Joachim Englisch
  8. The Fundamentals of the Portuguese Crisis By João Sousa Andrade; Adelaide Duarte

  1. By: Rita Almeida; Pedro Carneiro (Institute for Fiscal Studies and University College London)
    Abstract: <p>Enforcement of labor regulations in the formal sector may drive workers to informality because they increase the costs of formal labor. But better compliance with mandated benefits makes it attractive to be a formal employee. We show that, in locations with frequent inspections workers pay for mandated benefits by receiving lower wages. Wage rigidity prevents downward adjustment at the bottom of the wage distribution. As a result, lower paid formal sector jobs become attractive to some informal workers, inducing them to want to move to the formal sector.</p>
    Date: 2011–09
  2. By: Roychowdhury, Punarjit; Dutta, Mousumi
    Abstract: The Informal Economy provides employment to more than 60 per cent of the labour population in the developing world despite being a site unfettered by regulations and social norms of fairness governing pay and work conditions. In assessing the factors behind an informal agent’s decision to formalize, it is asserted that rigidity in regulatory mechanism is the primary cause that impedes the process of formalization. However whether flexible regulations can encourage formalization by making gains of formalization more accessible and certain remains a question. In this paper we argue that flexible regulations does not necessarily manifest into the incentives that are essential for formalization. Reducing rigidities in regulation has a significant pay off only in the ambit of good governance. More specifically we hypothesise that degree of intensity of regulation will hardly matter in containing informality; rather what matters is the quality of governance and capability of the institutions to put the regulations into effect. Using secondary data for 46 countries over the period between 1980 and 2008, we empirically investigate into the linkages between governance, regulation and informal employment by developing static and dynamic panel data models and establish that in curbing informality what turns out to be crucial is the interaction between quality of governance and regulation.
    Keywords: Formalization; Governance; Informal Economy; Panel data; Regulation
    JEL: O17 O10 O43 C23 C01
    Date: 2011–09–27
  3. By: Paul E. Carrillo (Department of Economics/Institute for International Economic Policy, George Washington University); M. Shahe Emran (Department of Economics/Institute for International Economic Policy, George Washington University and IPD, Columbia University); Anita Rivadeneira (Centro de Estudios Fiscales, Servicio de Rentas Internas – Ecuador)
    Abstract: We use firm-level administrative data from Ecuador to study the implications of 'reverse withholding' for firms' tax behavior. Withholding does not affect tax liability of firms, but it may result in a discontinuity in the audit probability around the withholding threshold. Exploiting variation in withholding rates across industries and over time, we find that firms' profit taxes concentrate near the withholding rate. To explore the link between bunching and evasion, we use data from third party reports on sales and costs. We show that the firms that bunch are more likely to conceal their sales and inflate their costs. Finally, we create a profile of the firms that bunch and of their general managers: medium size firms in the coastal region headed by single males are significantly more likely to bunch and, presumably, to evade taxes.
    Keywords: Withholding, Reverse Withholding, Firms, Profit Tax, Bunching, Tax Evasion, Ecuador
    JEL: H25 H26 O23 O12
    Date: 2011–03
  4. By: Bruno Chiarini; Simona Monteleone (-)
    Abstract: Underlying this work is the idea that there is a problem of strategic complementarity of individuals who choose to evade. Complementarity results from the discretionary policies of governments and the strategic implications of the Studi di Settore (Sector Studies), the mechanism used in Italy to evaluate the income (in reality, the turnover) of professional categories and small firms. In the Italian case, policy discretion and the Sector Studies lead to a failure of the coordination mechanism of taxpayers and confer a strong advantage for the coordination mechanism of tax evaders. The outcome is a coordination failure where individuals converge to the least efficient equilibrium from a social perspective.
    Keywords: Tax Evasion; Tax Compliance; Audit Selection Mechanism; Complementarity.
    JEL: H26 C72
    Date: 2011–04–29
  5. By: Paul E. Carrillo (Department of Economics/Institute for International Economic Policy, George Washington University); M. Shahe Emran (Department of Economics/Institute for International Economic Policy, George Washington University and IPD, Columbia University); Gabriela Aparicio (Department of Economics, George Washington University)
    Abstract: This paper takes advantage of a rich firm level data set from Ecuador to analyze the effects of a reform in 2007 that introduced imprisonment for tax evasion and made a firm’s CFO liable for tax-crimes. Our dataset contains actual tax-return and financial-statement information for the universe of corporations in Ecuador from 2003 to 2007. We study the effects of higher punishment both at the intensive and extensive margins. We combine a difference-in-difference-in-difference approach with the DiNardo, Fortin and Lemieux decomposition method. This allows us to estimate the heterogeneous effects of the reform across the distribution of firms. We find that, at the intensive margin the reform led to an average 10% increase in real corporate tax payments. However, positive effects are only found at the right tail of the tax distribution (above the 75th percentile). At the extensive margin, the probability of entry into the tax-net increased, but most of the firms that entered the tax net claimed zero taxes.
    Keywords: Tax evasion, corporate tax compliance, tax reform, developing country, punishment, Ecuador
    JEL: H26 H32 O12
    Date: 2011–04
  6. By: Clara Delavallade
    Abstract: This paper empirically analyzes the main microeconomic determinants of two forms of corruption supply, administrative corruption and state capture, by Maghrebi firms. This study is based on a new database of nearly 600 Algerian, Moroccan and Tunisian firms. I show that tax evasion is a major factor in the engagement of firms in administrative corruption. The latter increases with the share of sales hidden by the firm as long as it is below half of total sales, and slightly decreases thereafter. State capture is fostered by a failing enforcement of property and contract rights. Interestingly, less competitive firms appear to engage more in both forms of corruption than the most dynamic ones. After assessing the robustness of my empirical results, I draw a comparison of the factors of corruption in North Africa, Uganda and transition countries.
    Keywords: Supply of Corruption, Administrative Corruption, State Capture, Tax Evasion, Competitiveness, North Africa
    JEL: C2 D73 O17 H32
    Date: 2011
  7. By: Joachim Englisch (University of Muenster)
    Abstract: Taxation inevitably gives rise to tax planning. In the era of globalization, multinationals in particular may not only try to exploit options, inconsistencies and gaps in domestic tax legislation, but they will also (re-)organize their business so as to make an optimal use of international tax sheltering opportunities. In order to curb ‘aggressive’ tax arbitrage, all developed jurisdictions rely on targeted anti-avoidance provisions. In addition, most tax systems will have recourse to a statutory general anti-avoidance rule (GAAR) or judge-made anti-avoidance doctrine to that effect; by contrast, the UK tax system relies on extensive purposive construction to thwart tax saving schemes that are based on an overly literal or technical interpretation of the tax statues. Under either approach, the most difficult task for tax administrations and courts is to draw as bright a line as possible between legitimate tax mitigation and unacceptable tax avoidance schemes. In areas of taxation that are harmonized by EU law, the issue becomes even more complex due to the influence of the ECJ doctrine of prohibition of abuse of (tax) law. This working paper deals with the anti-avoidance clause of Art. 15 of the EU Merger Directive, which is considered to be the most refined reflection of that doctrine in direct tax law. The paper first examines the Union law concept of tax avoidance in general, and under the Merger Directive in particular. The corresponding sections critically analyze the doctrinal approach of the ECJ; they also discuss key criteria and structural features that are relevant in the context of any kind of GAAR in order to distinguish it from mere purposive construction and to establish a dividing line to acceptable tax planning. Second, the paper highlights the implications of Art. 15 Merger Directive with respect to national anti-avoidance rules or doctrines that apply to cross-border reorganizational operations. A possible direct effect and mandatory nature of these and other ‘anti-tax abuse’-provisions of EU law will be discussed, as well as questions of burden of proof and the admissibility of legal presumptions of tax avoidance.
    Date: 2011
  8. By: João Sousa Andrade (University of Coimbra and GEMF); Adelaide Duarte (University of Coimbra and GEMF)
    Abstract: This paper analyses the fundamentals of the Portuguese crisis. The financial crisis of 2007 worsened and triggered the current Portuguese crisis. We argue that the main problem that the economy is facing is its output stagnation due to a kind of Dutch disease that has created high and increasing levels of indebtedness, low and decreasing levels of saving and has reduced Portuguese competitiveness. Moreover, the existence of a dualist labour market and a new vague of emigration reproduces inefficiency increasing unemployment of younger workers and the supply of human capital abroad funded by the Portuguese taxpayers. Governance problems such as bad public budget governance, lack of transparency and accountability are also at stake and have to be solved to allow the economy to return to its long-run growth path.
    Keywords: Growth, Debt, Saving, Dutch disease, Unemployment, Budget policy.
    JEL: E21 F34 H10 H63
    Date: 2011–09

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