nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒02‒20
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Causes and consequences of underground economy By Mara, Eugenia-Ramona
  2. Does Formal Work Pay? The Role of Labor Taxation and Social Benefit Design in the New EU Member States By Koettl, Johannes; Weber, Michael
  3. Size and causes of the underground economy in Spain: A correction of the record and new evidence from the MCDR approach By Pickhardt, Michael; Sardà, Jordi
  4. The underground economy in Romania By Mara, Eugenia Ramona
  5. Rigideces laborales y salarios en los sectores formal e informal en Colombia By Camilo Mondragón-Vélez; Ximena Peña; Daniel Wills
  6. The Impact of Colombia's Pension and Health Insurance Systems on Informality By Valentina Calderón; Ioana Marinescu
  7. Labor Informality and the Incentive Effects of Social Security: Evidence from a Health Reform in Uruguay By Marcelo Bérgolo; Guillermo Cruces
  8. The End of Bank Secrecy? An Evaluation of the G20 Tax Haven Crackdown By Niels Johannesen; Gabriel Zucman
  9. The use of tax havens in exemption regimes By Gumpert, Anna; Hines, James R.; Schnitzer, Monika

  1. By: Mara, Eugenia-Ramona
    Abstract: In this endeavor an attempt has been made to investigate the major causes and factors of influence of the underground economy. Our analysis is based on the study of tax payer behavior and taxation system pattern. The paper examines how social institutions and government policies affect underground economy. All these factors have an important impact on the level and size of underground economy and determine the consequences of this phenomenon.
    Keywords: underground economy; tax burden; corruption; taxation system
    JEL: O52 H26
    Date: 2011
  2. By: Koettl, Johannes (World Bank); Weber, Michael (World Bank)
    Abstract: The analysis presented in this paper defines three different synthetic measurements of disincentives for formal work: two standard measurements, namely the tax wedge and the marginal effective tax rate (METR); and a new, innovative measurement called formalization tax rate (FTR). The novelty of the latter is that it measures disincentives stemming not only from labor taxation, but also from benefit withdrawal due to formalization. A descriptive analysis across a large number of OECD and Eastern European countries reveals that the disincentives for formal work – when measured through the FTR – are especially high for low-wage earners. This suggests that formal work might not pay in this segment of the labor market, in particular for the so-called mini-jobs and midi-jobs (low paying part-time work). Another novelty of the paper is its empirical approach. Using EU-SILC 2008 data and OECD Tax and Benefit data for six Eastern European countries (Bulgaria, Czech Republic, Estonia, Latvia, Poland, and Slovakia), we match disincentives for formal work to individual observations in a large data set. Applying a probit regression, the analysis finds a significant positive correlation between FTR or METR and the incidence of being informal. In other words, controlling for individual and job characteristics, the higher the FTR or the METR that individuals are facing is, the more likely they are to work informally. The tax wedge, on the other hand, yields a negative correlation. This indicates that the tax wedge is not sufficiently capturing disincentives for formal work. We also conclude that in cross-country analysis, it might be more useful to use the tax wedge that applies to low wage earners as opposed to average wage earners.
    Keywords: tax evasion, non-wage labor costs and benefits, informal employment, measurement of work disincentives, formalization tax rate
    JEL: H26 J32 O17
    Date: 2012–01
  3. By: Pickhardt, Michael; Sardà, Jordi
    Abstract: We review existing estimates of the size of the Spanish underground economy, apply the Ahumada et al. (2007, RIW) correction procedure to some of them and calculate the size of the underground economy in Spain for the period 1960 through 2009 by using the modified-cash-deposits-ratio (MCDR) approach recently developed by Pickhardt and Sardà (2011, EJLE). We then extend the MCDR approach with respect to an analysis of the causes of the Spanish underground economy. Contrary to most other studies, we show that the latter is not predominantly caused by tax pressure, but by labor market aspects, macroeconomic influences and criminal activities. Based on these findings we derive some unprecedented policy recommendations. --
    Keywords: underground economy,shadow economy,hidden economy,black economy,cash-deposit-ratio,currency demand approach,MIMIC approach
    JEL: O17 H26 C22
    Date: 2011
  4. By: Mara, Eugenia Ramona
    Abstract: The actual economic crisis has a major impact on the underground economy because of tax burden increase especially. This study realizes an analysis of the major implications of the economic crises on the size and the consequences of the underground activities. Also we try to reveal the correlation between the underground economy and the official one. The conclusion of this study is that the shadow activities have grown since the financial crisis began.
    Keywords: underground economy; tax burden; taxation system
    JEL: O10 H2
    Date: 2011
  5. By: Camilo Mondragón-Vélez; Ximena Peña; Daniel Wills
    Abstract: Este artículo estudia el impacto de los aumentos en los costos no salariales y el salario mínimo sobre los salarios en los sectores formal e informal en Colombia durante el periodo 1988 a 2006. La estrategia de identificación incluye variación de los costos no salariales en el tiempo; y tanto del salario mínimo a nivel de ciudad como del ciclo económico a nivel del hogar (considerando medidas alternativas a nivel regional), además de su variación temporal. Utilizando regresiones por percentiles encontramos que aumentos tanto en los costos no salariales como en el salario mínimo disminuyen los salarios de todos los trabajadores. Los resultados sobre costos no salariales se mantienen en el análisis por sectores, así como el efecto negativo del salario mínimo sobre los salarios en el sector informal. En cuanto al sector formal, los resultados muestran que el efecto del salario mínimo para aquellos trabajadores que permanecen dentro de este sector es decreciente a lo largo de la distribución de salarios, y resulta negativo para las dos terceras partes de los trabajadores con mayores ingresos. Adicionalmente, encontramos evidencia de que la jornada laboral aumentó, como respuesta de los empleadores a mayores rigideces y costos del factor trabajo (particularmente en el sector formal).
    Date: 2011–11–30
  6. By: Valentina Calderón; Ioana Marinescu
    Abstract: This paper examines how changes in the legislation governing health and pension benefits that took place between 2003 and 2008 in Colombia affected the informal and formal labor markets. In particular, this paper examines two major changes in the legislation. First, it looks at the effects of imposing the requirement to use the same base income to contribute to both health insurance and pensions for independent workers using a difference-in-differences strategy. Second, this document addresses the effects of unifying health and pension system payments, which required employers to make contributions to these two plans through a unified payment system, making it more difficult to contribute differently to the one plan versus the other. The results presented in this paper suggest that this reform increased both full formality and full informality, but with larger positive effects on full formality.
    Keywords: Labor :: Social Security, Health :: Health Policy, Social Development :: Social Policy & Protection, Informal Sector, Pensions, Health Insurance, Social Protection
    JEL: I11 I18 O17
    Date: 2011–03
  7. By: Marcelo Bérgolo; Guillermo Cruces
    Abstract: This paper studies the incentive effects of social security benefits on labor market informality following a policy reform in Uruguay. The reform extended health benefits to dependent children of private sector salaried workers, and thus altered the incentive structure of holding formal jobs within the household. The identification strategy of the reform¿s effects relies on a comparison between workers with children (affected by the reform) and those without children (unaffected by the reform). Difference in differences estimates indicate a substantial effect of this expansion of coverage on informality rates, which fell significantly by about 1.3 percentage points (a 5 percent change) among workers in the treatment group with respect to those in the control group. The evidence also indicates that individuals within households jointly optimized their allocation of labor to the formal and informal sector. Workers responded to the increased incentives for only one member of the household to work in the formal sector. These findings provide evidence of the relevant and substantial incentive effects of social security benefits on the allocation of employment.
    Keywords: Labor :: Workforce & Employment, Labor :: Social Security, Health :: Health Policy, CEDLAS
    Date: 2011–03
  8. By: Niels Johannesen (Department of Economics - University of Copenhagen - University of Copenhagen); Gabriel Zucman (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: During the financial crisis, G20 countries compelled tax havens to sign bilateral treaties providing for exchange of bank information. Is it the end of bank secrecy? Exploiting a unique panel dataset, we study how the treaties affected bank deposits in tax havens. Our results suggest that most tax evaders did not respond to the treaties but that a minority responded by transferring their deposits to havens not covered by a treaty. Overall, the G20 tax haven crackdown caused a modest relocation of deposits between havens but no significant repatriation of funds: the era of bank secrecy is not yet over.
    Keywords: Tax havens ; Tax evasion
    Date: 2012–02
  9. By: Gumpert, Anna; Hines, James R.; Schnitzer, Monika
    Abstract: This paper analyzes the tax haven investment behavior of multinational firms from a country that exempts foreign income from taxation. High foreign tax rates generally encourage firms to invest in tax havens, though significant costs of reallocating taxable income dampen these incentives. The behavior of German manufacturing firms from 2002-2008 is consistent with this prediction: at the mean, one percentage point higher foreign tax rates are associated with three percentage point greater likelihoods of owning tax haven affiliates. This contrasts with earlier evidence for U.S. firms subject to home country taxation, which are more likely to invest in tax havens if they face lower foreign tax rates. Foreign tax rates appear to be unrelated to tax haven investments of German firms in service industries, possibly reflecting the difficulty they face in reallocating taxable income. --
    Keywords: tax havens,multinational firms,tax avoidance,profit shifting,manufacturing FDI,service FDI
    JEL: H87 F23
    Date: 2011

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