nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2013‒11‒14
ten papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. The Dynamics of Vietnam Informal Sector: Which Policy Should Be the Best? By Nguyen Dinh Chuc; Tran Thi Bich; La Hai Anh
  2. Distributional Implications of Tax Evasion and the Crisis in Greece By Matsaganis, Manos; Leventi, Chrysa; Flevotomou, Maria
  3. The Economic Returns to Entrepreneurship – Implications for Stimulating Entrepreneurship By Astebro , Thomas B.
  4. The Impact of Education on the Behaviour of Labor Supply in Cameroon: an Analysis using the Nested Multinomial Logit Model By Nga Ndjobo, Patrick Marie; Abessolo, Yves André
  5. Entrepreneurship versus Joblessness: Explaining the Rise in Self-Employment By Paolo Falco; Luke Haywood
  6. Profit shifting and 'aggressive' tax planning by multinational firms: Issues and options for reform By Fuest, Clemens; Spengel, Christoph; Finke, Katharina; Heckemeyer, Jost H.; Nusser, Hannah
  7. Do transfer pricing laws limit international income shifting? Evidence from European multinationals By Theresa Lohse; Nadine Riedel
  8. The political economics of redistribution, inequality and tax avoidance By Bethencourt, Carlos; Kunze, Lars
  9. Endogenous Capital Market Imperfection, Informal Interest Rate Determination and International Factor mobility in a General Equilibrium Model By Chaudhuri, Sarbajit; Gupta, Manash Ranjan
  10. Informal taxation systems – Zakat and Ushr in Pakistan as example for the relevance of parallel/semi-public dues By Lorenz, Christian

  1. By: Nguyen Dinh Chuc (CIEM, Vietnam); Tran Thi Bich; La Hai Anh
    Date: 2013
  2. By: Matsaganis, Manos; Leventi, Chrysa; Flevotomou, Maria
    Abstract: The current Greek crisis and the governments fiscal consolidation effort have elevated tax evasion to one of the most crucial policy issues in the domestic debate. The paper attempts to shed light on one aspect of the phenomenon, namely its distributional implications. We compare a large panel data sample of personal income tax returns in 2006-2010 (incomes earned in 2005-2009) with data from the European Union Survey of Income and Living Conditions of the same years. We show that the deviation of incomes between the two data sources is greater in the case of farming and self-employment income. Based on these findings we then calculate stylised factors of income under-reporting by income source. These factors are fed into a tax-benefit microsimulation model to provide tentative estimates of the size and distribution of income tax evasion in Greece in 2009. We estimate income under-reporting at 12.2%, resulting in a shortfall in personal income tax receipts of 29.7%. The paper shows that the effects of tax evasion in Greece are higher income inequality and much lower progressivity of the income tax system.
    Date: 2013–11–07
  3. By: Astebro , Thomas B.
    Abstract: Recent evidence on relative earnings from entrepreneurship versus wage work shows that after controlling for observable differences, entrepreneurs in most developed countries on average apparently earn less than employees. Does this mean that the choice of entrepreneurship should be encouraged or discouraged? The answer depends in part on whether one believes that entrepreneurs report their income truthfully or not. Adjusting for what is considered underreporting by entrepreneurs using observed differences in expenditures lifts entrepreneurial mean earnings by between 10 percent and 40 percent, reversing the above mentioned negative difference into a positive difference. If this adjustment result continues to hold in further analysis, there is no a priori reason to increase the support of entrepreneurs in developed countries, and one should discuss decreasing it.
    Keywords: Entrepreneurship; returns; income underreporting; public policy
    JEL: J23 M13
    Date: 2013–05–01
  4. By: Nga Ndjobo, Patrick Marie; Abessolo, Yves André
    Abstract: This article renders an analysis of the impact of education on labour supply behaviour, particularly in terms of participation decision and the level of employment and unemployment of the active population in the labour market in Cameroon, through the nested logit model. Using data obtained from the database of ECAM III carried out in 2007, we find that individuals who constitute the labour supply being faced with four alternatives (domestic activities, the informal, the public and the private formal sectors) choose to work in the sectors which best values their education. Thus, for these individuals, it is more likely to choose to practice in the sectors associated with lower levels of education than other sectors. Also, these individuals have the tendency of orientating their choices primarily to sectors in which the average level of education is at most equivalent to theirs. Therefore, signals sent by job-seekers to employers, requesting access demand to certain sectors instead of others are obviously determine by their various levels of education. Moreover, participation in a sector of the job market in Cameroon is a decreasing function of average charged income and average worked hours that are established.
    Keywords: education, labor supply, nested multinomial logit, public formal, private formal and informal sectors, ECAMIII, Cameroon
    JEL: C35 C51 D1 I2 J22 J24
    Date: 2013–11–02
  5. By: Paolo Falco; Luke Haywood
    Abstract: The self-employed constitute a large proportion of the workforce in developing countries and the sector is growing. Different accounts exist as to the causes of this development, with pull factors such as high returns to capital contrasted with push factors such as barriers to more desirable salaried jobs. Using data from Ghana, we investigate the changing structure of earnings in self-employment relative to salaried work. We decompose earnings in a two-sector labour market allowing for flexible patterns of sorting on unobservables by means of a correlated random coefficient model estimated by IV-GMM. A unique panel dataset provides us with suitable instruments to tackle the endogeneity of sector choice and capital accumulation. We show that returns to productive characteristics in SE have increased significantly over the period 2004-11 and the sector has attracted workers with higher skills. We conclude that pull factors have significantly strengthened, pointing against the grim view of self-employment as an occupation of last resort.
    Keywords: : self-employment, semiparametric models, comparative advantage, segmentation, African labour markets
    JEL: O15 J24 J42 C14
    Date: 2013
  6. By: Fuest, Clemens; Spengel, Christoph; Finke, Katharina; Heckemeyer, Jost H.; Nusser, Hannah
    Abstract: This paper discusses the issue of profit shifting and 'aggressive' tax planning by multinational firms. The paper makes two contributions. First, it provides some background information to the debate by giving a brief overview of existing empirical studies on profit shifting and by describing arrangements for IP-based profit shifting which are used by the companies currently accused of avoiding taxes. We then show that preventing this type of tax avoidance is, in principle, straightforward. Second, we argue that, in the short term, policy makers should focus on extending withholding taxes in an internationally coordinated way. Other measures which are currently being discussed, in particular unilateral measures, like limitations on interest and license deduction, fundamental reforms of the international tax system and country-by-country reporting, are either economically harmful or need to be elaborated much further before their introduction can be considered. --
    Keywords: tax avoidance,profit shifting,multinational firms,intellectual property,tax policy,tax reform
    JEL: H20 H25 F23 K34
    Date: 2013
  7. By: Theresa Lohse (University of Mannheim); Nadine Riedel (University of Hohenheim, CESifo Munich & Oxford University CBT)
    Abstract: In recent years several countries have augmented their national tax laws by transfer pricing legislations which intend to limit the leeway of multinational firms to exploit international corporate tax rate diverences and relocate profit to low-tax affiliates by distorting intra-firm transfer prices. The aim of this paper is to empirically investigate whether these laws are instrumental in restricting shifting behaviour. To do so, we exploit unique information on the scope and evolution of national transfer pricing laws and link it with panel data on European multinationals. In line with previous studies, we find evidence for tax-motivated profit shifting. The analysis further suggests that transfer pricing rules significantly reduce shifting activities. The effect is economically relevant, suggesting that the legislations may be socially desirable despite the high administrative burden they impose on firms and tax authorities.
    Keywords: corporate taxation, international prot shifting, transfer pricing laws
    JEL: H25 F23
    Date: 2013
  8. By: Bethencourt, Carlos; Kunze, Lars
    Abstract: A benchmark result in the political economy of taxation is that the degree of redistribution is positively linked to income inequality. However, empirical evidence supporting such a relationship turns out to be mixed. This paper shows how these different empirical reactions can be rationalized within a simple model of tax avoidance and costly tax enforcement. By focussing on structure induced equilibria in which taxpayers vote over the size of the income tax and the level of tax enforcement, we show that higher inequality may well decrease the extent of redistribution, depending on two opposing effects: the standard political effect and a negative tax base effect working through increases in the average level of tax avoidance and the share of enforcement expenditures in total tax revenue.
    Keywords: Tax avoidance, Voting, Redistribution
    JEL: D72 H26 H31
    Date: 2013–10–31
  9. By: Chaudhuri, Sarbajit; Gupta, Manash Ranjan
    Abstract: This paper makes a pioneering attempt to provide a theory of determination of interest rate in the informal credit market in a less developed economy in terms of a three-sector static deterministic general equilibrium model. There are two informal sectors which obtain production loans from a monopolistic moneylender and employ labour from the informal labour market. On the other hand, the formal sector employs labour at an institutionally fixed wage rate and takes loans from the competitive formal credit market. We show that an inflow of foreign capital and/or an emigration of labour raises (lowers) the informal (formal) interest rate but lowers the competitive wage rate in the informal labour market when the informal manufacturing sector is more capital-intensive vis-à-vis the informal agricultural sector. International factor mobility, therefore, raises the degrees of distortions in both the factor markets in this case.
    Keywords: Informal credit, formal credit, moneylender, foreign capital, emigration, general equilibrium
    JEL: D4 D42 F21 F22 O17
    Date: 2013–11–02
  10. By: Lorenz, Christian
    Abstract: This article provides an overview of the religious background of Zakat and the organisation of the Zakat collection in several Islamic countries. Then the mandatory system in Pakistan of Zakat and Ushr is described in more detail. Zakat and Ushr are spent mainly on much targeted areas like social welfare, education and health care for certain population groups. Other types of public goods and services are not covered with funds received from Zakat. Hence, the question arises, whether an Islamic state is according to the Islamic laws entitled to collect additional revenues like taxes in addition to Zakat. A second question is answered in the text, in how far an engagement of religious leaders in tax reform activities is in line with the Islamic law and can contribute to development activities. Taking into account the cultural and religious factors and actors, the involvement of Mullahs or Friday prayers to promote tax morale requires the support of religious scholars, but might have broader impacts even than governmental activities on the public awareness. To answer both questions it is important that - according to important religious scholars - the Islamic state requires additional revenues to cover all necessary demands of its population. One permitted option to collect additional revenues is taxation. Finally the different types of individual giving increase the total amount paid to formal and informal taxation systems in Pakistan by about 1%. Nevertheless, formally the tax to GDP ratio does not change, because Zakat is statistically classified as social assistance benefits, which do not become part of the tax to GDP indicator.
    Keywords: Informal taxation system, Islamic taxation, Zakat, Ushr, tax to GDP ratio, Pakistan
    JEL: H22 H27
    Date: 2013

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