nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2013‒10‒18
thirteen papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. The role of information in tax compliance: Evidence from a natural field experiment By Tuomas Kosonen; Olli Ropponen
  2. When You Know Your Neighbor Pays Taxes: Information, Peer Effects, and Tax Compliance By James Alm; Kim M. Bloomquist; Michael McKee
  3. Can e-filing reduce tax compliance costs in developing countries ? By Yilmaz, Fatih; Coolidge, Jacqueline
  4. Efficient tax reporting: The effects of taxpayer information services By Christian A. Vossler; Michael McKee
  5. Audits as Signals By Kotowski, Maciej H.; Weisbach, David A.; Zeckhauser, Richard J.
  6. Do Building Up of Values Matter? An Analysis of Ethical Values of Accounting Professionals and Unethical Reporting Practices in Accounting By Singh, Ajay Kumar; Vasudeva, Sakshi
  7. In name only: Are free trade zones assisting capitalism or criminals and crony capitalists? By Roger Bate
  8. Do the Laws of Tax Incidence Hold? Point of Collection and the Pass-Through of State Diesel Taxes By Kopczuk, Wojciech; Marion, Justin; Muehlegger, Erich; Slemrod, Joel
  9. Wage Subsidy in the DRC: A CGE Analysis By Jean Luc Erero, Daniel Djauhari Pambudi and Lumengo Bonga Bonga
  10. Intensive Margin and Extensive Margin Adjustments of Labor Market : Turkey versus United States By Temel Taskin
  11. Corporate Governance, Incentives, and Tax Avoidance By Armstrong, Christopher S.; Blouin, Jennifer L.; Jagolinzer, Alan D.; Larcker, David F.
  12. Investor Valuations of Japan's Adoption of a Territorial Tax Regime: Quantifying the Direct and Competitive Effects of International Tax Reform By Bradley, Sebastien; Dauchy, Estelle; Hasegawa, Makoto
  13. Piracy, Awareness and Welfare in a Required Aftermarket By Ben O. Smith

  1. By: Tuomas Kosonen; Olli Ropponen
    Abstract: It is challenging to distinguish the role of information in tax compliance from other factors affecting it. This paper utilizes a novel natural field experiment design to study the issue. In the experiment firms reporting their VAT were sent a letter asking them questions about their attitude towards the tax authority. The introductions to the questions provided candid information about VAT rules for a randomized treatment group, while a randomized control group was only asked questions without additional information. We observe the effects of the treatments directly from firm-level tax records. Providing information did reduce the noncompliance in tax reporting, which indicates that there were unintentional errors. The experimental design also allows us to study whether the difficulty and novelty of the tax code plays any role in tax compliance. The results indicate that tax reporting changes when new and easy information is provided.
    Keywords: tax compliance, information, field experiment
    JEL: C93 H26 H25
    Date: 2013–09–16
  2. By: James Alm; Kim M. Bloomquist; Michael McKee
    Abstract: In this paper, we argue that individuals are affected in their compliance behavior by the behavior of their “neighbors”, or those about whom they may have information, whom they may know, or with whom they may interact on a regular basis. Individuals seem more likely to file and to report their taxes when they believe that other individuals are also filing and reporting their taxes; conversely, when individuals believe that others are cheating on their taxes, they may well become cheaters themselves. We use experimental methods to test the role of such information about peer effects on compliance behavior. In one setting, we inform individuals about the frequency that their neighbors submit a tax return. In a second setting, we inform them about the number of their neighbors who are audited, together with the penalties that they pay. In both cases, we examine the impact of information on filing behavior and also on subsequent reporting behavior. We find that providing information on whether one’s neighbors are filing returns and/or reporting income has a statistically significant and economically large impact on individual filing and reporting decisions. However, this “neighbor” information does not always improve compliance, depending on the exact content of the information. Key Words: Tax evasion; Tax compliance; Behavioral economics; Experimental economics
    JEL: H26 C91
    Date: 2013
  3. By: Yilmaz, Fatih; Coolidge, Jacqueline
    Abstract: The purpose of this study is to investigate the association between electronic filing (e-filing) and the total tax compliance costs incurred by small and medium size businesses in developing countries, based on survey data from South Africa, Ukraine, and Nepal. A priori, most observers expect that use of e-filing should reduce tax compliance costs, but this analysis suggests that the assumption should be more nuanced. In particular, policies that require business taxpayers to submit paper-based information in addition to their e-filing roughly negate savings that would otherwise be realized. In addition, adoption of e-filing requires an up-front investment by the business not only in capital assets, but also in the time, effort, and resources required to learn how to use e-filing properly and efficiently. Small businesses, in particular, are likely to face a steep"learning curve"and should probably not be forced to use e-filing before the majority of them have access to computers (with reliable electricity service) and have had a chance to become familiar with both computer use and the Internet.
    Keywords: Taxation&Subsidies,Information Security&Privacy,Debt Markets,Information and Records Management,Emerging Markets
    Date: 2013–10–01
  4. By: Christian A. Vossler; Michael McKee
    Abstract: As policy makers recognize the complexity of the tax system can result in some “evasion” being due to errors, there has been increasing focus on the role of taxpayer services as a tool in the enforcement regime. Such programs can improve the image of the tax agency but the critical issue is the effect on tax reporting. While the earlier focus has been on tax evasion, tax overreporting is also an issue since it leads to inefficient resource allocation. Thus, the present paper focusses on the effectiveness of taxpayer service programs in enhancing tax reporting. Data are collected on tax reporting decisions via laboratory experiments designed to implement the tax reporting task. To investigate the effects of taxpayer services, we “complicate” these compliance decisions of subjects, and then provide “services” from the “tax administration” that allow subjects to compute more easily their tax liabilities. Briefly, we find that our subjects are less likely to file when tax liability is uncertain but the provision of information offsets this effect; it appears that simply providing the service, even an imperfect service, increases the propensity to file and the accuracy of the filing. Key Words: tax information services; tax reporting; behavioral economics; experimental economics
    JEL: H2 H26 C91
    Date: 2013
  5. By: Kotowski, Maciej H. (Harvard University); Weisbach, David A. (University of Chicago); Zeckhauser, Richard J. (Harvard University)
    Abstract: A broad array of law enforcement strategies, from income tax to bank regulation, involve self-reporting by regulated agents and auditing of some fraction of the reports by the regulating bureau. Standard models of self-reporting strategies assume that although bureaus only have estimates of the of an agent's type, agents know the ability of bureaus to detect their misreports. We relax this assumption, and posit that agents only have an estimate of the auditing capabilities of bureaus. Enriching the model to allow two-sided private information changes the behavior of bureaus. A bureau that is weak at auditing, may wish to mimic a bureau that is strong. Strong bureaus may be able to signal their capabilities, but at a cost. We explore the pooling, separating, and semi-separating equilibria that result, and the policy implications. Important possible outcomes are that a cap on penalties increases compliance, audit hit rates are not informative of the quality of bureau behavior, and by mimicking strong bureaus even weak bureaus can induce compliance.
    Date: 2013–09
  6. By: Singh, Ajay Kumar; Vasudeva, Sakshi
    Abstract: Accounting scandals have shaken the confidence of the investor in the companies. Large number of people lost their money in these scandals. All these scandals were attributed to false, misleading, or untruthful accounting. This undermines the role of accounting professionals who did not report material manipulations in the financial results of the company. The study attempted to find an association between ethical values of accounting professionals and their choices in ethical dilemmas in their profession. Correlation scores in this study revealed that there is a statistically significant low degree of positive correlation between value assessment ratings and ethical dilemmas in scenarios. Similarly, the correlation coefficients computed between scenario ratings and formal ethics education indicates that the latter would be important in preventing the instances of unethical reporting. Ethical value score of professionals were found to be more explanatory than formal ethical education. The study strongly recommends building up of rigorous ethical and fiduciary responsibility in the financial sector through various means. The auditors must be trained to become responsible, independent, and judicious while conducting audits. Professional bodies should encourage compliance with ethical reporting practices in accounting by both carrot and stick approach.
    Keywords: Ethics, Values, Accounting professionals,unethical reporting,
    JEL: M41
    Date: 2013
  7. By: Roger Bate
    Abstract: Free trade zones possess many attributes of capitalist economies and can attract foreign companies, foreign investment in domestic companies, industrial production, and wealth generation. However, such zones are also troubling; they can produce several negative results including a strong mafia presence, massive counterfeit operations, tax evasion, money laundering, and even terror financing.
    Keywords: Hezbollah,Free Trade zone,Counterfeit pharmaceuticals,China
    JEL: A F
    Date: 2013–10
  8. By: Kopczuk, Wojciech (Columbia University); Marion, Justin (University of CA, Santa Cruz); Muehlegger, Erich (Harvard University); Slemrod, Joel (University of MI)
    Abstract: The canonical theory of taxation holds that the incidence of a tax is independent of the side of the market which is responsible for remitting the tax to the government. However, this prediction does not survive in certain circumstances, for example when the ability to evade taxes differs across economic agents. In this paper, we estimate in the context of state diesel fuel taxes how the incidence of a quantity tax depends on the point of tax collection, where the level of the supply chain responsible for remitting the tax varies across states and over time. Our results indicate that moving the point of tax collection from the retail station to higher in the supply chain substantially raises the pass-through of diesel taxes to the retail price. Furthermore, tax revenues respond positively to collecting taxes from the distributor or prime supplier rather than from the retailer, suggesting that evasion is the likely explanation for the incidence result.
    Date: 2013–09
  9. By: Jean Luc Erero, Daniel Djauhari Pambudi and Lumengo Bonga Bonga
    Abstract: This paper analyses wage subsidies on lower-skilled formal workers in the Democratic Republic of Congo (DRC). A multi-sectoral empirically-calibrated general equilibrium model capturing the economy-wide transactions between the formal and informal sectors is used to analyse one policy simulation in the DRC. The short and long run simulation in which the government provides wage subsidy to lower-skilled workers indicates that the government is able to significantly improve the deficiencies of the formal and informal households’ real disposable incomes. There is a general increase across formal and informal sectors in real household disposable incomes due to wage subsidy. The simulation results show that subsidy allocation narrowed the income gap between high and low income households, and between formal and informal sectors as well. The result seems somewhat insightful for wage policy simulation as the wage subsidy that targets lower-skilled formal workers increases real GDP from the expenditure side by 1.19% and 3.19% in the short and long run, respectively, from the baseline economy.
    Keywords: wage subsidy, informal sector, CGE model, Democratic Republic of Congo
    JEL: C68 D58 E24 E26 O17 R28
    Date: 2013
  10. By: Temel Taskin
    Abstract: In this paper, we document the intensive and extensive margin adjustments of labor market in Turkey and US.We find that both margins are important. More interestingly, the weight of intensive margin adjustment is substantially smaller than that of the extensive margin in both countries. This is robust to using various data sets and methods. Common wisdom and some theory would expect these countries to divert from each other significantly, because they represent two extreme points of labor market exibility with respect to OECD Employment Protection Index. A possible explanation for our empirical result is the sizable informal sector and self employment in Turkey as it might reduce the large hiring and firing costs and encourage firms towards extensive margin adjustment, and high hours per worker which might restrict the intensive margin adjustment, especially during booms.
    Keywords: intensive margin, extensive margin, labor market exibility, employment protection
    JEL: J20 J60
    Date: 2013
  11. By: Armstrong, Christopher S. (University of PA); Blouin, Jennifer L. (University of PA); Jagolinzer, Alan D. (University of CO); Larcker, David F. (Stanford University)
    Abstract: This paper examines the link between corporate governance, managerial incentives, and tax avoidance. Similar to other investment opportunities, unresolved agency problems may cause managers to over- or under-invest in tax avoidance relative to the preferences of shareholders. Using quantile regression, we find that the impact of corporate governance on tax avoidance is most pronounced in the upper and lower tails of the tax avoidance distribution, but not at the mean or median of this distribution. Specifically, we find a positive relation between the financial sophistication and independence of boards and tax avoidance in the upper tail of the tax avoidance distribution, but a negative relation in the lower tail of the tax avoidance distribution. However, we find no relation between corporate governance and tax avoidance and either the conditional mean or median of the tax avoidance distribution. These results suggest that corporate governance tends to decrease extremely high levels of tax avoidance and increase extremely low levels of tax avoidance, which may be symptomatic of over- and under-investment, respectively, by managers. Our results also suggest that inferences about these relations that are drawn from the conditional mean and median and unlikely to be representative across the entire tax avoidance distribution.
    JEL: G34 H25 H26 K34 M41
    Date: 2013–04
  12. By: Bradley, Sebastien (Drexel University); Dauchy, Estelle (New Economics School); Hasegawa, Makoto (National Graduate Institute for Policy Studies)
    Abstract: Globalization of firm operations has brought the issue of multinational taxation to the forefront of tax reform debates worldwide, with countries paying increasingly close attention to tax developments elsewhere around the world. Using an event study methodology that emphasizes specific firm attributes, we examine investor reactions in both the Japanese and U.S. stock markets to nine events leading up to the enactment of the 2009 Japanese dividend exemption in order to measure the perceived gains in short- and long-term after-tax profitability resulting from this reform. We thus aim to provide a comprehensive evaluation of the full range of direct tax savings effects and indirect effects associated with changes in firm competitiveness and international tax competition. Preliminary results suggest that investors capitalized gains of over 1 percent and 0.3 percent on the date that the bill was finally passed in the Japanese and U.S. markets, respectively, with further pronounced gains arising in the aftermath of select earlier events associated with the revelation of significant new information. Direct tax savings are responsible for a significant proportion of estimated abnormal returns across multiple event dates, even for U.S. firms where these effects are necessarily largely in anticipation of the adoption of a similar territorial regime. Strikingly, the largest beneficiaries of the Japanese reform appear to be firms with less elaborate tax minimization strategies or with no foreign operations altogether, whereas U.S. multinationals with subsidiaries located in tax havens appear more heavily favored.
    Keywords: territorial taxation; international tax reform; dividend exemption; tax competition; tax avoidance
    JEL: F23 H25 H32
    Date: 2013–08–01
  13. By: Ben O. Smith
    Abstract: Many industries have two sales stages: the primary market and the aftermarket. Existing research shows consumers are routinely unaware of aftermarkets (Cruickshank, 2000; Hall, 2003); and due to legal or structural restrictions, firms commonly have monopoly power (Borenstein et al., 2000; Adelmann, 2010). However, the primary market could be a great deal more competitive. Examples of this sales process include products with service agreements, software with in-app purchases, and durable goods with required replacement parts. But in many of these aftermarkets, the consumer has the option to obtain the aftermarket product through non-traditional means (e.g. âpiracyâ). We model such an environment by combining the two most common travel cost models: A Salop circle (Salop, 1979) for the primary market and a Hotelling linear city (Hotelling, 1929) for the aftermarket. We find that firms with more competition in the primary market will spend more on âenforcementâ (disincentivising non-traditional acquisitions) and reduce prices in the primary market so they may exhibit more market power in the aftermarket. This is in direct contradiction with the common belief that anti-piracy efforts are the domain of âbig businessâ (Tan, 2002; Kwong et al., 2003; Lysonski and Durvasula, 2008). Further, we find that it is social welfare enhancing for âenforcementâ spending to be as effective as possible.
    JEL: D21 L11 L12
    Date: 2013–10–07

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