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on Informal and Underground Economics |
| By: | Juergen Jung (Department of Economics, Towson University); Chung Tran (Research School of Economics, The Australian National University) |
| Abstract: | We study the dynamic general equilibrium effects of introducing a social pension program to elderly informal sector workers in developing countries who lack formal risk sharing mechanisms against income and longevity risk. To this end, we formulate a stochastic dynamic general equilibrium model that incorporates defining features of developing countries: a large informal sector, private transfers as an informal safety net, and a non-universal social security system. We find that the extension of retirement benefits to informal sector workers results in efficiency losses due to adverse effects on capital accumulation and the allocation of resources across formal and informal sectors. Despite these losses recipients of social pensions experience welfare gains as the positive insurance effects attributed to the extension of a social insurance system dominate. The welfare gains crucially depend on the skill distribution, private intra-family transfers and the specific tax used to finance the expansion. |
| Keywords: | Informal Sector, Family Social Safety Nets, Social Pension, General Equi-librium, and Welfare. |
| JEL: | E6 E21 E26 H30 H53 H55 I38 O17 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:tow:wpaper:2011-06&r=iue |
| By: | Kweka, Josaphat; Fox, Louise |
| Abstract: | The household enterprise sector has a significant role in the Tanzanian economy. It employs a larger share of the urban labor force than wage employment, and is increasingly seen as an alternative to agriculture as a source of additional income for rural and urban households. The sector is uniquely placed within the informal sector, where it represents both conditions of informal employment and informal enterprise. This paper presents a case study on Tanzania using a mixed approach by combining both quantitative and qualitative analysis to examine the important role of household enterprises in the labor force of Tanzania, and to identify key factors that influence their productivity. Household enterprise owners are similar to typical labor force participants although primary education appears to be the minimum qualification for household enterprise operators to be successful. Access to location matters -- good, secure location in a marketplace or industrial cluster raises earnings - and access to transport and electricity is found to have a significant effect on earnings as well. In large urban areas, the biggest constraint faced by household enterprises is the lack of access to secure workspace to run the small business. Although lack of credit is a problem across all enterprises in Tanzania, household enterprises are more vulnerable because they are largely left out of the financial sector either as savers or borrowers. Although HEs are part of the livelihood strategies of over half of households in Tanzania, they are ignored in the current development policy frameworks, which emphasize formalization, not productivity. Tanzania has a large number of programs and projects for informal enterprises, but there is no set of policies and program interventions targeted at the household enterprise sector. This gap exacerbates the vulnerability of household enterprises, and reduces their productivity. |
| Keywords: | Access to Finance,Banks&Banking Reform,Labor Markets,Population Policies,Debt Markets |
| Date: | 2011–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5882&r=iue |
| By: | Sugata Marjit (City University of Hong Kong); Amit K. Biswas |
| Abstract: | Stringent regulations coupled with corruption generate and sustain extra legal or informal transactions in the developing countries. Does trade related reform discourage informal activities and corruption? This paper attempts to analyze such a phenomenon. An import competing firm allocates production between a high wage formal and a low wage informal segment. Illegal use of labour in the informal sector is characterized by a probability of punishment which depends on the size of the informal output. In such a structure, as tariff comes down, total employment contracts but the informal sector expands. However, lowering of interest rate, possibly through the liberalization of capital account, tends to reduce the size of the informal segment. Hence, trade reforms may have conflicting impact on informality and corruption. |
| Keywords: | Trade Liberalization, Informal sector, corruption |
| JEL: | F11 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:eab:tradew:22896&r=iue |
| By: | Fabrizio Borselli (Banca d'Italia) |
| Abstract: | The European Union’s VAT system has become vulnerable to organised fraud schemes. In recent years, these schemes, undergoing a change in structure, have affected services and imports of goods from third countries and may also have shifted trade in goods among EU countries. Within the EU-27, organised VAT fraud is estimated to amount to between €20 billion and €35 billion a year. The EU institutions and Member States have put forward several measures to tackle this problem, although some of these have placed a disproportionate burden on businesses. The article shows that need to maximise the effectiveness of anti-VAT-fraud strategy cannot be separated from a broad view of the problem and of the functioning of the VAT system as a whole. A drastic change in the VAT system might provide a robust defence against fraud but produce uncertain effects. Enhancing risk management and exchange of good practices is essential. Technology-based solutions appear to be a pragmatic and politically feasible approach to new challenges, with good prospects of success. |
| Keywords: | VAT, tax evasion, fraud |
| JEL: | H21 H26 K34 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_106_11&r=iue |
| By: | Feige, Edgar L.; Cebula, Richard |
| Abstract: | Abstract This study empirically investigates the extent of noncompliance with the tax code and examines the determinants of federal income tax evasion in the U.S. Employing a refined version of Feige’s (1986; 1989) General Currency Ratio (GCR) model to estimate a time series of unreported income as our measure of tax evasion, we find that 18-23 % of total reportable income may not properly be reported to the IRS. This gives rise to a 2009 “tax gap” in the range of $390-$537 billion. As regards the determinants of tax noncompliance, we find that federal income tax evasion is an increasing function of the average effective federal income tax rate, the unemployment rate, the nominal interest rate, and per capita real GDP, and a decreasing function of the IRS audit rate. Despite important refinements of the traditional currency ratio approach for estimating the aggregate size and growth of unreported economies, we conclude that the sensitivity of the results to different benchmarks, imperfect data sources and alternative specifying assumptions precludes obtaining results of sufficient accuracy and reliability to serve as effective policy guides. |
| Keywords: | Unreported economy; Underground economy; tax evasion; tax gap; noncompliance; income tax evasion; currency demand approach; currency ratio models |
| JEL: | O17 E52 E26 H26 E41 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34781&r=iue |
| By: | Feige, Edgar L. |
| Abstract: | New Estimates of U.S. Currency Abroad, the Domestic Money Supply and the Unreported Economy Edgar L. Feige * Abstract Despite financial innovations that have created important new substitutes for cash usage, per capita holdings of U.S. currency amount to $2950. Yet American households and businesses admit to holding only 15 percent of the currency stock, leaving the whereabouts of 85 percent unknown. Some fraction of this unaccounted for currency is held abroad (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions earning income that is not reported to the IRS (the unreported economy hypothesis). We find that the percentage of U.S. currency currently held overseas is between 30-37 percent rather than the widely cited figure of 65 percent. This finding is based on the official Federal Reserve/Bureau of Economic Analysis data which is a proxy measure of the New York Federal Reserve’s (NYB) “confidential” data on wholesale currency shipments abroad. We recommend that the NYB data be aggregated so as to circumvent confidentiality concerns, and be made readily available to all researchers in order to shed greater light on the questions of how much U.S. currency is abroad and on the particular location of overseas U.S. dollars. The newly revised official estimates of overseas currency holdings are employed to determine the Federal Reserve’s seigniorage earnings from 1964-2010, which have provided a $287 billion windfall for U.S. taxpayers. Overseas currency stock data are also used to derive estimates of the domestically held stock of currency as well as narrow and broad measures of domestic monetary aggregates. These domestic monetary aggregates are believed to be better predictors of future economic activity than traditional monetary aggregates and are tested to determine their ability to predict fluctuations in real output and prices. Domestic cash holdings are finally used to estimate the size of the U.S. unreported economy as measured by the amount of income that is not properly reported to the IRS. By 2010, we estimate that legal and illegal source unreported income” is $1.9 - $2.4 trillion, implying a “tax gap” in the range of $400- $550 billion. Currently, we estimate that 18-23 percent of total reportable income is not properly reported to the IRS. |
| Keywords: | Overseas currency; currency abroad; underground economy; unreported economy; domestic money supply; tax gap; tax evasion; cash payments; monetary aggregates |
| JEL: | E51 O17 E52 E26 H26 E41 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34778&r=iue |
| By: | Stéphane Gauthier (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Guy Laroque (CREST-INSEE - Centre de Recherche en Economie et en Statistique - Institut national de la statistique et des études économiques (INSEE)) |
| Abstract: | Random taxation may be optimal when the taxpayers differ in their attitudes towards risk, so that tax randomization enables the government to relax the incentive constraints. The paper provides a necessary and sufficient condition for local random deviations to be welfare improving in a neighborhood of a nonrandom optimum. It also derives conditions satisfied by a global random optimum. A full analytical derivation is given for a two goods two agents economy with isoelastic utilities. |
| Keywords: | Random taxation, stochastic contract, second best, tax evasion. |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00639834&r=iue |
| By: | Andersson, Lina (Linnaeus University); Hammarstedt, Mats (Linnaeus University); Hussain, Shakir (University of Birmingham); Shukur, Ghazi (Jönköping International Business School & Linnaeus University) |
| Abstract: | We investigate the importance of ethnic origin and local labour markets conditions for self-employment propensities in Sweden. In line with previous research we find differences in the self-employment rate between different immigrant groups as well as between different immigrant cohorts. We use a multilevel regression approach in order to quantify the role of ethnic background, point of time for immigration and local market conditions in order to further understand differences in self-employment rates between different ethnic groups. We arrive at the following: The self-employment decision is to a major extent guided by factors unobservable in register data. Such factors might be i.e. individual entrepreneurial ability and access to financial capital. The individual’s ethnic background and point of time for immigration play a smaller role for the self-employment decision but are more important than local labour market conditions. |
| Keywords: | Self-employment; immigrant background; local labour market |
| JEL: | J15 R23 |
| Date: | 2011–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0261&r=iue |