nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒04‒10
three papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Tax avoidance and fiscal limits: Laffer curves in an economy with informal sector By Lukas Vogel
  2. The Dynamics of Inequality Change in a Highly Dualistic Economy: Honduras, 1991.2007 By Klasen, Stephan; Otter, Thomas; Villalobos Barria, Carlos
  3. From Shadow to Green: Linking Environmental Fiscal Reforms and the Informal Economy By Mikel González-Eguino; Anil Markandya; Marta Escapa

  1. By: Lukas Vogel
    Abstract: The paper extends the QUEST III model by home production to discuss fiscal limits in an economy with tax avoidance. It finds that revenue-maximising labour and corporate tax rates in the benchmark model are relatively high (54% and 72%) compared to current EU-average implicit tax rates. No such limit is found for the consumption tax. Higher substitutability between market and home production flattens the Laffer curves for labour and corporate taxation and introduces one for the consumption tax. Although higher tax rates raise additional tax revenue, the economic costs of higher distortionary taxation in terms of output contraction are substantial.
    JEL: E62 H20 H30
    Date: 2012–01
  2. By: Klasen, Stephan; Otter, Thomas; Villalobos Barria, Carlos
    Abstract: We examine the drivers of inequality change in Honduras between 1991-2007, trying to understand why inequality increased in Honduras until 2005, while it was falling in most other Latin American countries. Using annual household surveys, we document first rising inequality between 1991-2005, which is followed by falling inequality thereafter. Using an inequality decomposition technique, we show that the rising inequality between 1991 and 2005 was, for the most part, driven by the dispersion of labour incomes in rural areas. We also show that the extraordinary labour earnings disequalization is mainly the result of a widening wage gap between the tradable and non-tradable sectors and occupations, combined with highly segmented labour markets and poor overall educational progress. The underlying determinants of the divergencebetween tradable and non-tradable sectors were highly overvalued currencies and poor commodity process for Honduras. agricultural exports. Between 2005 and 2007, however, the inequality reduction was a result of equalizing trends in labour and non-labour incomes. The commodity boom promoting the tradable sector and remittances (in this order) played a significant role here, with government transfers playing a small supporting role. Since the decline in inequality is largely driven by international factors, we cannot be sure whether the decline in inequality will continue.
    Keywords: inequality, decomposition, education, wages, Honduras, migration
    Date: 2012
  3. By: Mikel González-Eguino; Anil Markandya; Marta Escapa
    Abstract: In the past few decades many papers have analysed in some depth different environmental tax reforms and the double dividend hypothesis, i.e. the possibility of improving not only the environment but also the economy through the reduction of distortions in the tax system. Recently, more stress has been placed on testing empirically what effects a reduction in labour taxes may have on unemployment when accompanied by a carbon or other environmental tax. However, such studies have not modelled the effects of the presence of a shadow economy, even though informal markets account for a significant and growing part of GDP in many developed economies. This paper analyses this link using an Applied General Equilibrium model for the case of Spain, which has one of the highest unemployment rates in the world and one of the biggest informal economies of any wealthy country. We conclude that our analysis strengthens the case for an environmental tax reform in Spain if revenues from a CO2 tax are recycled via a labour tax reduction.
    Keywords: Environmental fiscal reform, double dividend hypothesis, shadow economy, unemployment, general equilibrium analysis, Spain
    Date: 2012–03

This nep-iue issue is ©2012 by Catalina Granda Carvajal. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.