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on Informal and Underground Economics |
| By: | Tomas Lichard; Jan Hanousek; Randall K. Filer |
| Abstract: | We develop a novel 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 have a secondary source of self-employed income. 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 underre- porting and truthful households. This avoids the need to identify non-evading and evading groups ex ante. 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: | endogenous switching regression; shadow economy; tax evasion; undereporting; |
| JEL: | C34 H26 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp494&r=iue |
| By: | Merike Kukk; Karsten Staehr |
| Abstract: | This paper estimates the extent of income underreporting by households with business income relative to households of wage earners in Estonia. The paper uses a modified version of the methodology pioneered by Pissarides and Weber (1989). The extent of income underreporting is estimated by comparing food Engel curves for households with and without business income. The baseline result is that the reported income of households with business income above 20% of total income must be multiplied by 2.6 in order to attain the same propensity of food consumption as households of wage earners. Households with business income above 0 but below 20% also underreport income, but to a lesser extent. The estimates are higher than those found for developed countries, but consistent with other studies of the shadow economy in transition countries. The analysis also shows that the presence of business income is a better indicator of income underreporting than a reported status of self-employment. |
| Keywords: | tax evasion, business income, income underreporting, Engel curve, transition country |
| JEL: | H26 E21 E26 H24 |
| Date: | 2013–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2013-6&r=iue |
| By: | Dan Usher (Queen's University) |
| Abstract: | Important as it is for public policy, there is still no consensus about the size of the revenue-maximizing tax rate at the top of the Laffer curve. The purpose of this essay is not to supply a correct rate, but to identify difficulties in doing so. 1) Estimates of the revenue-maximizing tax rate are distorted by the discrepancy between the “elasticity of taxable income†at observed tax rates and as it would become at the revenue-maximizing tax rate, a discrepancy illustrated with reference to tax evasion as the source of the contraction in the tax base in response to increases in the tax rate. 2) When the response of tax revenue to tax rate is through the supply of labour, the Laffer curve may not be humped at all because the supply of labour may expand, rather than contract, in respond to an increase in the tax rate, causing tax revenue to rise more than proportionally to the tax rate all the way up to 100%. |
| Keywords: | Duty to Vote, Tax Evasion, Labour-leisure Choice |
| JEL: | H21 H26 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1320&r=iue |
| By: | Eduardo Augusto Soares Coelho Barbosa (Eduardo Augusto Soares Coelho Barbosa); Samuel Cruz Alves Pereira (Samuel Cruz Alves Pereira); Elísio Fernando Moreira Brandão (Elísio Fernando Moreira Brandão) |
| Abstract: | The purpose of this working paper is to identify the main factors that are at the origin of the Shadow Economy in Portugal, and to analyze its evolution over the period between 1977 and 2011. For the econometric analysis we used the Structural Model of Multiple Indicators and Multiple Causes - MIMIC, which was developed by Jöreskog, Karl G. and Arthur S. Goldberg (1975). The Structural Model of Multiple Indicators and Multiple Causes (MIMIC) is a special case of the models of structural equations (SEM – Structural Equation Models) allowing the specification of statistical relationships between causal variables (observed) and latent variables (non-observed), which in turn affect, in an indirect way, a set of observed indicators. The conclusion is that, among the selected causal variables in this working paper, the unemployment rate and the subsidies granted to enterprises are the ones that contribute the most to the evolution of the Shadow Economy. It is also concluded that the share of the Shadow Economy in Portugal, during the period under review, had a sharp decrease between 1997 and 2000, from about 52% to 13.4% of the GDP. Since 2001 the Shadow Economy has been rising again, accentuating its growth rate after 2007, and it reached a peak of 24.2% of the GDP in 2011. |
| Keywords: | Shadow Economy, MIMIC Model, Portugal |
| JEL: | O17 H26 C39 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:514&r=iue |
| By: | Max Gillman (Department of Economics, University of Missouri-St. Louis); Michal Kejak |
| Abstract: | The paper shows a key role of human capital in explaining how US postwar growth and welfare could have increased while tax rates declined. As in evidence, we assume that the share of government revenue in output has remained stable and model tax evasion within an endogenous growth model with human capital. A trend upwards in the productivity of the goods or human capital sectors grad- ually decreases the degree of tax evasion, and causes a trend upwards in time spent in human capital accumulation. These productivity increases also increase the ratio of tax revenue to GDP at any given tax rate such that the tax rate must be reduced in order to be consistent with the stylized fact of a constant share of government revenue in output. Based on estimated US postwar goods and hu- man capital sectoral productivities, the model explains 30% of the actual decline in a weighted average of postwar US top marginal personal and corporate tax rates. The estimated joint sectoral productivity increases are asymmetric with a larger relative increase in the human capital investment sector, a result related to McGrattan and PrescottÂ’s (2010) relatively larger increase in the productivity of the sector producing intangible capital relative to the goods sector. We show that in a special case of exogenous growth without human capital investment, the explanatory power of the tax trend drops signiÂ…cantly. |
| Keywords: | Tax evasion, intermediation technology, endogenous growth, human capital productivity, dynamic general equilibrium. |
| JEL: | E13 E62 H26 O41 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:msl:workng:1001&r=iue |
| By: | Renzo Orsi (University of Bologna); Davide Raggi (University of Bologna); Francesco Turino (University of Alicante; ) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:12-217&r=iue |
| By: | Mazhar Waseem |
| Abstract: | This paper analyzes the effects of personal income taxation on earnings, formality and business organization choices of agents. I use a tax reform introduced in Pakistan in 2009, which increased taxation of partnership firms substantially relative to other unincorporated firms, as a natural policy experiment to identify behavioral responses to taxation that include movement into informality, under-reporting taxable earnings, and income shifting to tax-favored business forms. Relying on administrative tax records that comprise the universe of income tax returns filed in 2006â11, I find that the tax rate rise caused the exit of a large number of treated firms: the number of such firms reporting positive taxable earnings declined by 41% in 2009, by another 27% in 2010, and by an additional 15% in 2011. By tracking personal income tax returns of owners of the exited firms, I find that around 45% of the owners moved into informality, the rest switched their business organization. For the treated firms that did not exit, I document almost 50% reduction in reported earnings compared to untreated firms. Combining these estimates of behavioral responses with a simple conceptual framework, I compute that 133% of the projected increase in tax revenue was lost through the behavioral responses, implying that the new tax rate on partnership earnings was on the wrong side of the Laffer curve and would not have been optimal under any social preferences. The excess burden created by the reform increases by nearly 17% if negative spillovers on VAT base are also taken into account. |
| JEL: | H21 H24 H32 O17 |
| Date: | 2013–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2013:pwa641&r=iue |
| By: | Giovanni Favero (Dept. of Management, Università Ca' Foscari Venice) |
| Abstract: | The research here proposed is a micro-analysis of a business ending in bankruptcy in the aftermaths of the first oil shock, concerning the Italian subsidiary of a German wareenamelling group established in the town of Bassano in 1925. Following the budget reports and the interviews with the former entrepreurs, the company flourished until the 1960s, when managerial and entrepreneurial successions emphasized the growing difficulties deriving from growing labour costs. A tentative reorganization of the company was hindered in 1968 by union resistance and political pressures for the preservation of employment levels. In 1975 the board of directors decided to declare bankruptcy as a consequence of the huge budget losses. However, a subsequent inquiry of the Italian tax authority discovered an accounting fraud concerning hidden profits in 1974 and 1975. The fraud disclosure shows how historical conditions could create the convenience for performance understatement not only for fiscal purposes, but also in order to make divestment possible. However, it is also used here as an element to argue that business sources and the story they tell should not be taken at their face value, and that a different reconstruction of the company's path to failure is possible. The literature concerning the missed recognition of opportunities is then mobilised in order to interpret the inconsistencies that emerge from the triangulation of business archives, press columns and interviews with union representatives and politicians. This allows to put back into perspective what results as an obsession of company management with labour costs, concealing the importance of other competitive elements, such as the increasing specialisation of the producers of home appliances. This 'refractive error' may be typical of businesses operating in (presumed) mature industries at international level, where wage differentials offer the opportunity to pursue quite literally exploitation much further. |
| Keywords: | Business history, foreign direct investments, family business, accounting fraud, corporate governance |
| JEL: | N84 G34 L21 F23 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:vnm:wpdman:63&r=iue |
| By: | Vaillant, Julia; Nordman, Christophe Jalil |
| Abstract: | We use a representative sample of informal entrepreneurs in Madagascar to add new evidence on the magnitude of the gender performance gap. After controlling for business and entrepreneur characteristics, female-owned businesses exhibit a value added 28 percent lower than their male counterparts. Correcting for endogenous selection into informal self-employment raises the gap by 5 percentage points. We then investigate the role of sharing norms and gender-differentiated allocation of time within the household in the gender performance gap, by estimating their effect on the technical inefficiency of female and male entrepreneurs. Only male entrepreneurs seem subject to pressure to redistribute from the distant network. Our findings are consistent with situations where women working at home would essentially feel negatively the burden of their own community due to intense social norms and obligations in their workplace but also of domestic chores and responsibilities. We find evidence of females self-selecting themselves into industries in which they can combine marketoriented and domestic activities. |
| Keywords: | Gender; entrepreneurship; informal sector; sharing norms; household composition; Madagascar; |
| JEL: | D13 D61 O12 J16 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:dau:papers:123456789/12203&r=iue |
| By: | Simeon Djankov; Rafael LaPorta; Florencio Lopez-de-Silanes; Andrei Shleifer |
| Abstract: | We present new data on the regulation of entry of start-up firms in 85 countries. The data cover the number of procedures, official time, and official cost that a start-up must bear before it can operate legally. The official costs of entry are extremely high in most countries. Countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have lighter regulation of entry. The evidence is inconsistent with public interest theories of regulation, but supports the public choice view that entry regulation benefits politicians and bureaucrats. |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:19462&r=iue |
| By: | Ioannidis, Yiorgos |
| Abstract: | Στόχος της παρούσας εργασίας είναι να δώσει μια εκτίμηση του μεγέθους της κρυφής ανεργίας καθώς και να αναλύσει τις ροές μεταξύ της απασχόλησης, της ανεργίας και του μη οικονομικά ενεργού πληθυσμού εργάσιμης ηλικίας. Με τον όρο κρυφή ανεργία αναφερόμαστε σε εκείνα τα άτομα που είτε είναι ακούσια άνεργοι είτε υποαπασχολούμενοι αλλά δεν καταγράφονται ως άνεργοι από την Έρευνα Εργατικού Δυναμικού. Για την εκτίμηση του πραγματικού ποσοστού ανεργίας χρησιμοποιήσαμε δύο μεθοδολογίες: εκείνη που προτείνεται από το ACOSS (Australian Council of Social Service) και εκείνη που διατυπώθηκε αρχικά από το Perry (1971) και αναπτύχθηκε περαιτέρω από τον Mitchell (2000). The aim of the paper is to estimate of the size of hidden unemployment in Greece. By hidden unemployment we refer to those people who are unemployed or involuntarily underemployed but they are not counted as unemployed by the Labour Force Survey. To estimate the actual unemployment rate we used two methodologies: one proposed by the ACOSS (Australian Council of Social Service) and one developed by Mitchell (2000) |
| Keywords: | hidden unemploymen |
| JEL: | E24 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52120&r=iue |
| By: | Renata Narita |
| Abstract: | Self employment comprises around thirty percent of the workforce in Latin America. Most self employed evade payroll taxes, have low education, and run small businesses requiring low skills. I develop and estimate a life cycle search model where workers can be wage earners in the formal or informal sector, self employed or unemployed. Firms in the formal sector pay payroll and severance taxes, and in the informal sector, they can be fined. The estimated model (i) reproduces well the composition of workers over the life cycle as observed in Brazilian Labour Force data, and (ii) shows that the job value of the self employed is similar to that of informal wage earners. The model is used as a tool to evaluate the welfare impact of labour market policies, where self employment may be an option. When simulating an increase in the cost of informality by ten percent, results showed (i) small impact on employment composition and informality; (ii) significant cost pass-through to wages in the informal sector, meaning a reduction in the lowest wages in the economy, hence higher wage inequality. On the other hand, (iii) it led to substantial improvement in the welfare of formal firms and of all workers. These results prove that taking into account labour market frictions is important in welfare analyses of policies in multisectoral labour markets. As simulations which increase the cost of informality suggest, stricter enforcement of labour regulations (at least to a certain degree) can be a way towards efficient labor markets. |
| Keywords: | Self employment; Occupational choice; Informal Sector; Job Search; Labour market welfare |
| JEL: | J30 J24 O17 J42 J60 |
| Date: | 2013–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2013wpecon21&r=iue |
| By: | Rita Almeida; Pedro Carneiro, Renata Narita |
| Abstract: | There is an open debate on how governments can help the creation of higher quality jobs. This paper explores unique administrative data on the enforcement of labor market regulations across Brazilian cities between 1996 and 2006 to analyze this topic. We proxy job quality with several attributes going beyond wages and formality of the work contract. In the context of a strictly regulated labor market, we find robust evidence of (i) a strong trade-off between the provision of mandated non-wage benefits and wage levels, on the one hand, and the provision of optional job benefits on the other, and (ii) more formality leads to higher mean wages in the economy. We argue that enforcement policies can increase welfare depending on how workers value the benefits they get through formal channels vis-à-vis wages and optional benefits. |
| Keywords: | Enforcement of labor regulations; Informal sector; Job quality |
| JEL: | J2 J3 K31 O17 |
| Date: | 2013–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2013wpecon22&r=iue |
| By: | Kresimir Zigic; Jiri Strelicky; Michael Kunin |
| Abstract: | Two software developers, each offering a product variety of different (exogenously given) quality, compete in prices for heterogeneous users who choose from purchasing a legal version, using an illegal copy, and not using a product at all. Using an illegal version violates intellectual property rights (IPR) and is thus punishable when disclosed. If a developer considers the level of piracy as high, he can introduce protection for his product in the form of restricting support and other services to illegal users. We study the positive and normative implications of the interaction between a regulator's IPR protection and the IPR protection that producers themselves may undertake to protect their IPR against the end users' software piracy. In particular, we aim to establish when the two forms of IPR protections (public and private) act as complements and when as substitutes to each other. Finally, we explore the situations in which there is (or is not) a conflict of interest between the regulator and the developers in this respect. |
| Keywords: | vertically differentiated duopoly; software piracy; Bertrand competition; private and public intellectual property rights protection; |
| JEL: | D43 L11 L21 O25 O34 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp490&r=iue |
| By: | Massimo Florio (DEAS, Universita' di Milano) |
| Abstract: | The proposal to use privatization proceeds in order to decrease public debt in Italy is criticized for several reasons. The Italian debt, now more than 133 per cent of the GDP is the outcome of fundamental fiscal unbalances, including large tax evasion. Without targeting such unbalances, the privatization proceeds will only contribute to delaying a fiscal crisis. Moreover, when a government sells its assets, it exchanges real or financial assets with cash, and the ratio Debt/Gdp is a poor indicator of the net wealth of the state. The possibility that selling government assets may create a demand side shock is unlikely. Eventually, given the difficulty to tax income in a country with large tax evasion, taxation of private wealth should be considered. Private wealth/Gdp per capita ratio in Italy is higher than in Germany and in several other developed countries, and is a symptom of the fiscal anomaly of the country, as this private wealth is the counterpart of public debt, tax evasion, tax elusion, corruption, and rent capture by some social groups. |
| Keywords: | Public debt, privatization, tax evasion, private wealth |
| JEL: | L33 H26 H63 |
| Date: | 2013–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:mst:wpaper:201304&r=iue |