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on Informal and Underground Economics |
| By: | Francesco Busato; Bruno Chiarini |
| Abstract: | This paper studies equilibrium effects of fiscal policy within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. In particular, we show that a dynamic general equilibrium with tax evasion may give a rational justification for a variant of the Laffer curve for a plausible parameterization. In this respect, the paper also identifies the different parameterization of the model formulation with tax evasion under which a Laffer curve exist. From a revenue maximizing perspective, the key policy messages are that bringing tax payers to compliance would be better than announcing to punish them if convicted, and that an economy without problems of compliance is much more sensitive to myopic behavior. |
| Keywords: | Two-sector Dynamic General Equilibrium Models, Fiscal Policy, Tax Evasion and Underground Activities |
| JEL: | E32 E13 H20 E26 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:itt:wpaper:2012-8&r=iue |
| By: | James Alm (Department of Economics, Tulane University); Keith Finlay (Department of Economics, Tulane University) |
| Abstract: | In this paper, we examine the distributional effects of tax evasion, using results from theoretical, experimental, empirical, and especially the general equilibrium literatures on tax evasion. Much, if not all, of this evidence concludes that the main beneficiaries of successful tax evasion are the tax evaders themselves, with distributional effects that largely favor higher income individuals. However, when general equilibrium adjustments in commodity and factor prices are considered, the distributional effects become considerably more complicated. The work on tax compliance is also put in the broader context of the distributional effects of other types of criminal activities, where similar forces seem to be at work. We conclude with some suggestions for future research. |
| Keywords: | tax evasion, general equilibrium |
| JEL: | H26 H22 D03 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1214&r=iue |
| By: | James Alm (Department of Economics, Tulane University); Benno Torgler (School of Economics and Finance, Queensland University of Technology) |
| Abstract: | In this paper we argue that puzzle of tax compliance can be explained, at least in part, by recognizing the typically neglected role of ethics in individual behavior; that is, individuals do not always behave as the selfish, rational, self-interested individuals portrayed in the standard neoclassical paradigm, but rather are often motivated by many other factors that have as their main foundation some aspects of "ethics". We argue that it is not possible to understand fully an individual's compliance decisions without considering in some form these ethical dimensions. Specifically, we argue here that there is much direct and indirect evidence that ethics differ across individuals and that these differences matter in significant ways for their compliance decisions. We then put this in the larger context of the inability of the standard neoclassical paradigm to explain compliance of at least some individuals, and we suggest several possible avenues by which theory can be expanded to incorporate ethics. We conclude by arguing that a full house of compliance strategies is also needed to combat tax evasion, strategies that include the traditional "enforcement" paradigm suggested by and consistent with neoclassical theory, a less traditional "service" paradigm that recognizes the important role of a "kinder and friendlier" tax administration in encouraging compliance, and, importantly, a new "trust" paradigm that is built on the foundation of ethics, in which the tax administration must recognize that it can erode the ethics of taxpayers by its own decisions. |
| Keywords: | economics-of-crime, ethics, expected utility theory, tax evasion, behavioral economics, social norms, tax morale |
| JEL: | H26 H31 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1207&r=iue |
| By: | James Alm (Department of Economics, Tulane University) |
| Abstract: | In this paper, I assess what we have learned about tax evasion since Michael Allingham and Agnar Sandmo launched the modern analysis of tax evasion in 1972. I focus on three specific questions and the answers to these questions that have emerged over the years. First, how do we measure the extent of evasion? Second, how can we explain these patterns of behavior? Third, how can we use these insights to control evasion? In the process, I illustrate my own answers to these questions by highlighting various specific examples of research. My main conclusion is that we have learned many things but that we also still have many gaps in our understanding of how to measure, explain, and control tax evasion. I also give some suggestions – and some predictions – about where promising avenues of future research may lie. |
| Keywords: | tax evasion, behavioral economics, experimental economics |
| JEL: | H2 H26 D03 C9 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1213&r=iue |
| By: | Erich Kirchler (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Stephan Muehlbacher (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Katharina Gangl (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Eva Hofmann (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Christoph Kogler (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Maria Pollai (Department of Applied Psychology: Work, Education and Economy, University of Vienna); James Alm (Department of Economics, Tulane University) |
| Abstract: | In tax compliance research, there has been a significant shift in research emphasis from the analysis of enforcement to the incorporation of trust-building measures that encourage cooperation. In this paper, we trace this shift. We first describe the four major "actors" in the tax compliance game and their complex interactions: taxpayers, elected government officials, appointed tax authorities (or the tax administration), and tax accountants. Second, we examine various perspectives on what determines the compliance decisions of individuals. We start with "economic" factors that are based on tax compliance as an individual decision under risk (e.g., audits and fines). We then move to factors based more on "psychology", like social norms, fairness, and interactions both between taxpayers and between taxpayers and the government. Indeed, over the past few decades the view of taxpayers has shifted from one in which an authoritarian government and its tax authority force citizens to pay their taxes under the threat of punishment, to a view in which both elected and appointed authorities provide the necessary services to enable compliance, and even more recently to a view of authorities and citizens cooperating with one another. Third, we present the "slippery slope" framework as a way of integrating economic and psychological aspects into a unified framework. We conclude with recommendations based on this framework that can improve compliance. |
| Keywords: | tax evasion, behavioral economics, social norms, "slippery slope" |
| JEL: | H26 D03 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1212&r=iue |
| By: | James Alm (Department of Economics, Tulane University); Erich Kirchler (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Stephan Muehlbacher (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Katharina Gangl (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Eva Hofmann (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Christoph Kogler (Department of Applied Psychology: Work, Education and Economy, University of Vienna); Maria Pollai (Department of Applied Psychology: Work, Education and Economy, University of Vienna) |
| Abstract: | In this paper we give our perspective on the different paradigms that have shaped – and seem likely to shape in the future – research in the field of tax compliance behavior. These research paradigms include viewing tax evasion as a decision under risk made by a single taxpayer, as a social dilemma in which there is a tension between individual interests (e.g., cheating on one's taxes) and collective goals (e.g., providing public goods), as a series of decisions made by many different types of taxpayers, and as a psychological contract between tax authorities and taxpayers. We argue that these different paradigms require that particular attention be paid to the main "actors in the field", which involves going beyond a focus on a single taxpayer to consider other taxpayers, tax accountants, the tax authorities, and the government. The ways in which these actors interact in different climates, especially the dynamics of power and trust between the actors, must also be considered. We conclude with a discussion of a framework – the "slippery slope framework" – that attempts to synthesize these different research paradigms. Throughout, we illustrate our arguments by reference to research that focuses especially on the European experience. |
| Keywords: | tax evasion, behavioral economics, social norms, "slippery slope" |
| JEL: | H26 D03 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1210&r=iue |
| By: | James Alm (Department of Economics, Tulane University); Chandler McClellan (Department of Economics, Georgia State University) |
| Abstract: | Much recent research has investigated whether values, social norms, and attitudes differ across countries and whether these differences have measurable effects on economic behavior. One area in which such studies are particularly relevant is tax compliance, and a factor that has been suggested as a factor in compliance behavior is "tax morale", or the intrinsic motivation to pay taxes. However, all of this work on tax morale has focused on individuals, not on firms. In this paper, we use information from the Business Environment and Enterprise Performance Survey and also from the World Enterprise Survey for a wide range of countries over several years of data to examine a firm's tax morale and the subsequent impact on firm tax compliance. We use these data first to examine a firm's perception of taxes as an obstacle to doing business. Importantly, once we control for the various factors that affect this perception, what is left is a measure that we believe is a measure of the firm's tax morale, as a driver of the firm's view of the appropriateness of cheating on taxes. With this measure of tax morale, we are then able to examine in a second stage estimation how our estimated firm tax morale affects the compliance decisions of the firm. Ultimately, our results allow us to identify factors that allow the government to improve its efforts to increase firm tax compliance. |
| Keywords: | tax evasion, tax morale, behavioral economics |
| JEL: | H26 H32 H26 H73 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1211&r=iue |
| By: | Andrew Feltenstein (Andrew Young School of Policy Studies, Georgia State University); Musharraf Cyan (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University) |
| Abstract: | This study develops a dynamic general equilibrium model, applied to Pakistani data, in which optimizing agents evade taxes by operating in the underground economy. The cost to firms of evading taxes is that they find themselves subject to credit rationing from banks. Our model simulations show that in the absence of budgetary flexibility to adjust expenditures, raising tax rates too high drives firms into the underground economy, thereby reducing the tax base. Aggregate investment in the economy is lowered because of credit rationing. Taxes that are too low eliminate the underground economy, but result in unsustainable budget and trade deficits. Thus, the optimal rate of taxation, from a macroeconomic point of view, may lead to some underground activity. We note, in particular, that incorporating a VAT without any other tax reductions greatly reduces the tax compliance of the service sector. We have applied our model to Pakistan, and have calibrated our model to an 8 year period from 2004-2011. We note that it gives a reasonable approximation of Pakistani macro data. We then use a sectoral breakdown of tax data generated by the model to estimate tax gaps on a sector by sector basis. We note that certain sectors are currently paying taxes below their potential, while others may be above their tax potential. These sectoral gap estimates may be used as indicators of where greater tax enforcement efforts should be directed. |
| Date: | 2012–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:ays:ispwps:paper1226&r=iue |
| By: | Raffaella Basile; Bruno Chiarini; Elisabetta Marzano |
| Abstract: | This paper analyzes the effects of fiscal policy in Italy by employing a database containing two statistical novelties: quarterly fiscal variables on accrual basis and a time series estimate of tax evasion for the period 1981:1-2006:4. Following Revenue Agency suggestions, we use in a VECM the time series of the concealed VAT base as a proxy for the size of “unreported production”, and define a regular GDP measure constructed as GDP net of government expenditure and evaded VAT base. The results reveal that we cannot rely upon the estimates of fiscal policy multipliers in countries with a sizeable unreported production unless the dynamics of the hidden and regular components of the GDP are disentangled. Changes in public spending and the tax rate generate a reallocation from underground to the regular economy which contributes to obscure the spending and tax effect on total GDP. In this setup the spending multiplier shows large long-run effects, considerably stronger than those registered in a model with no attention paid to unreported production. The drop in regular output, after an increase in the effective tax rate, tends to be considerable after one year, producing long-lasting effects and a significant increase in unreported production and tax evasion. |
| Keywords: | Fiscal policy, VECM, fiscal multipliers, unreported GDP, tax ratio, effective tax rate. |
| JEL: | C32 E62 H26 H62 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:itt:wpaper:wp2012-1&r=iue |
| By: | James Alm (Department of Economics, Tulane University); Mikhail I. Melnik (Department of Business Administration, School of Engineering Technology and Management, Southern Polytechnic State University) |
| Abstract: | How does online cross-border shopping affect state use tax liabilities? We collect our own data on actual online cross-border shopping transactions from eBay.com, focusing upon a "representative" commodity classification and a "typical" day. These data allow us to examine the extent of actual online cross-border shopping by buyers, and the subsequent potential impact on state use tax liabilities of buyers. Our results indicate that online cross-border shopping is highly prevalent on eBay, with out-of-state purchases accounting for on average 94 percent of the volume of a state's online purchase transactions. Even so, given the limited volume of eBay- based transactions relative to total sales transactions, the likely impact of cross-border transactions on state use tax revenue streams is negligible, even if we assume full buyer compliance with state use taxes. |
| Keywords: | online commerce, sales taxes, nexus, tax evasion |
| JEL: | H71 H73 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1206&r=iue |
| By: | James Alm (Department of Economics, Tulane University); Mikhail I. Melnik (Department of Business Administration, School of Engineering Technology and Management, Southern Polytechnic State University) |
| Abstract: | Online commerce presents consumers with a convenient way of shopping outside of their local jurisdiction, and this online purchase decision is capable of affecting in significant ways the sales and use tax collections of state governments. However, the actual revenue impact has proven difficult to estimate. There is considerable work that examines the revenue impact of seller compliance with sales taxes. However, there is little work on buyer compliance with use taxes. In this paper we investigate the potential impact of cross-border shopping on state use tax liabilities of buyers, using data from the largest online consumer-to-consumer and business-to-consumer marketplace, eBay.com. We collect our own data on actual cross-border shopping transactions from eBay, focusing upon a "representative" commodity classification and a "typical" day; these data consist of nearly twenty-one thousand eBay listings generated by roughly seven thousand individual sellers with over nine thousand buyers. These data allow us to examine the extent of actual, not estimated, cross-border shopping by buyers, and the subsequent potential impact of this cross-border shopping on state use tax liabilities. Our results indicate that cross-border shopping is highly prevalent on eBay, with out-of-state purchases accounting for on average 94 percent of the volume of a state's purchase transactions. Even so, given the limited volume of eBay-based transactions relative to total sales transactions, the likely impact of cross-border transactions on state use tax revenue streams is quite low, at least at present, typically less than one percent of actual state sales tax revenues. |
| Keywords: | online commerce, sales taxes, nexus, tax evasion |
| JEL: | H71 H73 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1205&r=iue |
| By: | Luca Barbone; Richard M. Bird (University of Toronto); Jaime Vazquez-Caro |
| Abstract: | This paper reviews the literature on the costs of VAT, beginning with a review of concepts with regard to different aspects of administrative and compliance costs and then a review of quantitative estimates of such costs. It concludes with a brief discussion of VAT non-compliance and fraud with special reference to European Union case.in the European VAT context, including some suggestive evidence on the trade-off between compliance costs and fraud. |
| Date: | 2012–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:ays:ispwps:paper1222&r=iue |
| By: | Bruno Contini; Elisa Grand |
| Abstract: | This paper is about very long term unemployment (a more appropriate denomination could be "out-of-official-employment") in Italy, its concentration and the process of young worker disposal, an important, yet unexplored, determinant. “Very long” is not just “long”: we are dealing with 10-20 years of absence from the official labor market of male workers who were young at the beginning of these spells, and are in their thirties, forties or early fifties when we observe them. Young workforce disposal (YWD) reflects the fact that young people are observed at the beginning of their career as dependent employees, their services are "used" for few years (sometimes only few months) as if it were a disposable commodity, after which they disappear from the official labor market. The magnitude of YWD is dramatic: out of 100 new young entries - aged 19-30 at the start of their working career -, between 79 and 86 % are still at regular work (“survive”) after 10 years, and only 78 to 83% by 2009, after 17-22 years, depending on the timing of their initial employment. Many of these people may have joined the irregular economy, but there is no way to estimate their numbers other than by a gross comparison with the estimates of hidden employment provided by ISTAT. These developments imply out-of-official-employment durations four times longer than the unemployment durations provided by official statistics and econometric estimates based on LFS-type microdata. A simple model of the medium run development of the YWD process explains the medium run impact of several demand-side factors: labor cost dynamics, flexibility, age, initial entry conditions. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:260&r=iue |
| By: | Sinha, Anushree; Kanbur, Ravi |
| Keywords: | International Development, Public Economics, |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:ags:cudawp:128801&r=iue |
| By: | Fachinelli, Angel dos Santos; Moretto, Antonio Carlos; Guilhoto, Joaquim José Martins; Rodrigues, Rossana Lott; Sesso Filho, Umberto Antonio |
| Abstract: | The objective of this study is to analyze the multiplier effect of jobs and income for the formal and informal categories, in an inter-regional input-output system. Therefore, it was used the array in the Southern Region and the Rest of Brazil, estimated for the years 1999 and 2004 organized in 23 sectors, with microdata from the National Household Sample Survey (PNAD) in the same years. Consider one, the individuals’ characterization according to educational level, age, income, gender and employment category (formal and informal). The main results include a decrease of the contribution from the macros sectors of Agricultural and Services in the regions. The State of Paraná, Santa Catarina and the Rest of Brazil decreased multipliers wages in formal and informal categories for most sectors, which was not observed in Rio Grande do Sul. The largest employment multipliers for both formal and informal categories were to sectors linked to Industry. |
| Keywords: | employment. South Region. input-output |
| JEL: | J6 J21 J23 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40607&r=iue |