nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒11‒11
five papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Measuring the Shadow Economy: Endogenous Switching Regression with Unobserved Separation By Tomas Lichard; Jan Hanousek; Randall K. Filer
  2. Tax Reform in Georgia and the Size of the Shadow Economy By Karine Torosyan; Randall K. Filer
  3. Tax Evasion and Public Expenditures on Tax Collection Services in an Endogenous Growth Model By Sifis Kafkalas; Pantelis Kalaitzidakis; Vangelis Tzouvelekas
  4. Institutions, trust and relations: a comparative analysis explaining informal economic activities By Adriaenssens, Stef; Hendrickx, Jef
  5. Nature and Dimensions of Farmers’ Indebtedness in India By Rajeev, Meenakshi; Vani , B P; Bhattacharjee, Manojit

  1. By: Tomas Lichard (CERGE-EI); Jan Hanousek (CERGE-EI); Randall K. Filer (Hunter College)
    Abstract: We develop an estimator of unreported income, perhaps due to tax evasion, that does not depend on as strict identifying assumptions as previous estimators based on microeconomic data. The standard identifying assumption that the self-employed underreport income whereas wage and salary workers do not is likely to fail in countries where employees are often paid under the table or engage in corrupt activities. Assuming that evading individuals have a higher consumption-income gap than non-evading ones due underreporting both to tax authorities and in surveys, an endogenous switching model with unknown sample separation enables the estimation of consumption-income gaps for both underreporting and truthful households. This avoids the need to identify non-evading and evading groups exante. This methodology is applied to data from Czech and Slovak household budget surveys and shows that estimated evasion is substantially higher than found using previous methodologies.
    Keywords: shadow economy,switch regression,income-consumption gap
    JEL: C34 E01 H26 J39
    Date: 2012
  2. By: Karine Torosyan (International School of Economics at TSU); Randall K. Filer (Hunter College)
    Abstract: This paper applies three different methods widely used in the literature to track changes in shadow economic activity in Georgia following a drastic tax reform in 2005. The first method is a currency demand approach based on macro level data. The second and third methods rely on micro data from household surveys. Overall, we find evidence that the amount of income underreporting decreased in the years following the reform. The biggest change is observed for households headed by a farmer, followed by “other” types of households where the head does not report any working status. Employed and self-employed households appear very similar before the tax reform and show minimal adjustment in income reporting in the post-reform period. Results, however, suggest that much of any difference may have come from increased enforcement efforts rather than rate changes.
    Keywords: hidden/shadow economy, tax reform, consumer behavior, transition economy
    JEL: E01 H26 J39
    Date: 2012
  3. By: Sifis Kafkalas (University of Crete); Pantelis Kalaitzidakis (Dept of Economics, University of Crete, Greece); Vangelis Tzouvelekas (Department of Economics, University of Crete, Greece)
    Abstract: This paper analyzes the relationship between tax evasion and the two main policy instruments affecting evasion rates, namely, the announced tax rate and the share of tax revenues allocated to tax monitoring mechanisms. For doing so, we adopt a simple one-sector endogenous growth model modified under tax evasion following Roubini and Sala-i-Martin (1993) analysis on income taxes and tax evasion. Our model confirms Barro�s (1990) theoretical finding stating that the optimal tax rate is equal to the elasticity of private capital. However, when tax evasion matters to the social welfare, the effective tax rate is lower than the output elasticity in line with Futagami et al., (1993) and Turnovsky (1997) theoretical results. Our model is then calibrated using data from 145 developed and developing countries for 2011. Simulation results suggest that both tax evasion and output growth are decreasing with the share of tax revenues allocated to monitoring expenses, while welfare maximizing policies imply an announced tax rate lower from the elasticity of public capital and a share of monitoring expenses around 6.0%.
    Keywords: tax evasion, tax monitoring, effective tax rate, social loss.
    JEL: H21 H26 H54
    Date: 2012–04–26
  4. By: Adriaenssens, Stef (HUBrussel); Hendrickx, Jef (HUBrussel)
    Abstract: One often explains why people engage in the informal sector with the Allingham-Sandmo model, resting on taxation level, deterrence and risk aversion. This neoclassical approach explains noncompliance fairly well, but anomalies exist. Evenly parsimonious, Alejandro Portes develops a institutional and social capital approach introducing regulation, enforcement, and the social wiring of society. The extent of regulation fuels informal transactions, while effective enforcement inhibits it. Portes hypothesizes that informality is fostered by social relations and trust, and curbed by institutional trust. This paper tests Portes’ theory with data from the European Social Survey in 13 countries complemented with country level data on regulation and enforcement. Ordinary and multilevel logistic regressions largely confirm the predictions regarding regulation, institutional trust and social relations. The limited variation of enforcement in the countries studied and the measurement of social trust does not allow for a definitive assessment of the relevance of those variables.
    Keywords: Social trust; Institutional trust; Social capital; Underground activities; Regulation; Enforcement; Social relations; Social networks; Informal economy; Tax evasion
    Date: 2012–09
  5. By: Rajeev, Meenakshi; Vani , B P; Bhattacharjee, Manojit
    Abstract: This paper examines nature and extent of farmers’ indebtedness in India using unit record data from NSSO 59th round, and provided a comparative picture of major Indian states. It shows using data from rice cultivating farmers that productivity of small farmers is not only higher than the medium farmers, it increases with access to credit. In terms of access to credit, seen through extent of indebtedness, Karnataka is better placed than many Indian states. But Andhra Pradesh, Tamil Nadu, Punjab and Kerala lie ahead of Karnataka. Ironically however, almost half of the credit is still provided by the informal sector in the state of Karnataka (on an average). Region wise picture shows that Southern region is more dependent on informal sources of credit. Poor farmers with lower land holdings are much more deprived of the formal sources of credit than the comparatively richer ones. Thus they also pay a much higher rate of interest with modal value of 36%. But it is heartening to note that loans are taken mostly for income generating purposes. It also indirectly implies that even for the income generating purposes poor are not getting access to formal sources of credit.
    Keywords: Incidence of indebtedness; productivity analysis; formal sector credit; indebted households
    JEL: A10 C80
    Date: 2012–10–31

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