nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2014‒04‒29
three papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Tax evasion and cognitive dissonance By Beckmann, Klaus; Gattke, Susan
  2. Implications of Recent Federal Personal Income Tax Increases for Income Tax Evasion, Tax Revenues, and Budget Deficits By Cebula, Richard; Boylan, Robert; Foley, Maggie; Isard, Douglass
  3. Technological progress with segmented factor markets and welfare implications for the urban poor By Mukherjee, Soumyatanu; Zafar, Sameen

  1. By: Beckmann, Klaus (Helmut Schmidt University, Hamburg); Gattke, Susan (Helmut Schmidt University, Hamburg)
    Abstract: We introduce public signals and cognitive dissonance into the standard Allingham-Sandmo- Yitzhaki (ASY) model of tax evasion. It turns out that the pres- ence of cognitive dissonance attenuates tax evasion as individuals dislike allowing their true bevhaviour to diverge from their public statement of the “admissible” degree of tax evasion, which, in turn, they use to influence the probability of detection. Some potential policy conclusions and extensions are discussed.
    Keywords: tax evasion; cognitive dissonance; public signals
    JEL: D03 H26 H30
    Date: 2014–04–17
  2. By: Cebula, Richard; Boylan, Robert; Foley, Maggie; Isard, Douglass
    Abstract: In 2013, federal personal income tax increases were implemented in the U.S. under provisions of two federal statutes: the American Taxpayer Relief Act of 2012 and the Patient Protection and Affordable Care Act of 2010. Based on our analysis of data for the time period 1970-2008, we argue that the incentives to engage in federal personal income tax evasion have been increased as a direct consequence of the public tax-increase policies manifested in these two statutes. To demonstrate this conclusion in the present study, we first present evidence that strongly suggests that personal income tax evasion has been an increasing function of the maximum marginal federal personal income tax rate over the period 1970-2008, which constitutes the most current data currently available on aggregate personal income tax evasion. This evidence leads us then to conclude that the federal personal income tax increases implemented effectively in 2013 under provisions of the two aforementioned statutes will result in increased tax evasion behavior and hence lower tax collections. Among other things, then, this public-policy-induced increase in personal income tax evasion also implies that the federal budget deficits in coming years will be greater than projected by the CBO and various government agencies. We also find that, among other things, federal personal income tax evasion has been an increasing function of the unemployment rate. Thus, among other things, there is also evidence that continued high unemployment rates may increase tax evasion and hence the size of federal budget deficits.
    Keywords: underground economy; tax evasion; income tax increases
    JEL: H24 H26 H31 H62
    Date: 2014–04–11
  3. By: Mukherjee, Soumyatanu; Zafar, Sameen
    Abstract: This analysis, in terms of a four-sector static general equilibrium framework, models the urban informal sector for a typical developing economy with labour market distortion in the form of unionised urban sector labour market and capital market segmentation between urban informal and formal credit markets. It has been highlighted in different literature that growth experience in the South Asian countries like India or Pakistan during liberalised regime have primarily been driven by the productivity take-off in the traded sectors. This theoretical analysis offers another attempt to predict the implications of technological progress in the traded formal sectors on informal wage, taking into consideration that real wage is a reasonable benchmark to measure the well-being of the economically marginalised people living under informal arrangements. The key model propositions are further exemplified by a sensitivity analysis using plausible ranges of parameter values for India. We also provide empirical evidence using data on twenty-seven Indian States (including one Union Territory) between 1989 and 2010 on informal wages, capital stocks in informal and formal zones and value-additions in the formal segment to substantiate the model prediction on informal wage depicted in our numerical exercise, which shows that the growth in informal wage could reasonably be linked to the productivity surge in the formal sectors, while greater capital accumulation in the informal units over the formal counterparts has further aggravated this upswing in informal wages.
    Keywords: Poverty; Technological Progress; Informal Wage; General Equilibrium
    JEL: E26 F11 F16 I32 O17
    Date: 2014–04

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