nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2015‒04‒02
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. A Matching Model of Endogenous Growth and Underground Firms By Lisi, Gaetano; Pugno, Maurizio
  2. Tax Agents Perceptions of the Corporate Taxpayers’ Compliance Costs under the Self-assessment System By Noor Sharoja Sapiei
  3. The labor market effects of reducing the number of illegal immigrants By Andri Chassamboulli; Giovanni Peri
  4. The Role of Accounting practices both in Abetting and Preventing Money Laudering By Muhammet Bezirci; Merve Oz; Halenur Yılmaz
  5. May the Soul of the IFS Financial System Definition RIP in Developing Countries By Asongu, Simplice
  6. Coordination and the fight against tax havens By Konrad, Kai A.; Stolper, Tim
  7. Knocking on Tax Haven’s Door: multinational firms and transfer pricing By Ronald B. Davies; Julien Martin; Mathieu Parenti; Farid Toubal

  1. By: Lisi, Gaetano; Pugno, Maurizio
    Abstract: Economic growth and unemployment exhibit an ambiguous relationship – according to empirical studies. This ambiguity can be investigated by observing the role of the underground economy in shaping the productivity of firms. Indeed, unemployment may be absorbed by underground firms, which adopt backward technology, at the cost of reduced economic growth. Alternatively, unemployment diminishes because productivity grows by employing workers who prefer to become skilled, and thus not to work in underground firms. This paper develops these arguments by using a matching model with underground firms and heterogeneous entrepreneurial ability, and by assuming skill-driven growth. Economic growth thus becomes endogenous, and both the underground sector and unemployment become persistent. The main result is that, under conditions of strict monitoring of the regularity of firms, the underground economy is squeezed, unemployment is reduced, and growth is high, whereas in the case of lax monitoring, the underground economy expands, unemployment is absorbed, and growth is low.
    Keywords: unemployment, underground firms, entrepreneurship, endogenous growth, human capital, education, matching models.
    JEL: E26 J24 J64 L26
    Date: 2015–02–16
  2. By: Noor Sharoja Sapiei (University of Malaya)
    Abstract: Reforms and changes in tax laws may affect the level of complexity in the tax system and increase taxpayer compliance costs burden. In Malaysia, the introduction of Self-assessment System (SAS) imposes greater accountability in terms of computational, recordkeeping and filing requirements upon taxpayers. The increase in taxpayer obligations coupled with higher possibility of audit may require taxpayers to seek assistance from tax agents to handle tax matters on their behalf. In spite of the expanding role of tax agents in tax reporting under the SAS, very little research has been directed at examining their views and perceptions. This study, therefore, evaluates the compliance costs of corporate taxpayers from the perspective of tax agents.
    Keywords: Tax Compliance Costs, Self-assessment System, Tax Agents, Corporate Taxpayers, Corporate Income Tax
    JEL: H26 M29 M49
    Date: 2014–05
  3. By: Andri Chassamboulli; Giovanni Peri
    Abstract: A controversial issue in the US is how to reduce the number of illegal immigrants and what effect this would have on the US economy. To answer this question we set up a two-country model with search in labor markets and featuring legal and illegal immigrants among the low skilled. We calibrate it to the US and Mexican economies during the period 2000-2010. As immigrants, especially illegal ones, have a worse outside option than natives their wages are lower. Hence their presence reduces the labor cost of employers who, as a consequence, create more jobs per unemployed when there are more immigrants. Because of such effect our model shows that increasing deportation rates and tightening border control weakens the low-skilled labor markets, increasing unemployment of native low skilled. Legalization, instead decreases the unemployment rate of low-skilled natives and it increases income per native.
    Keywords: job creation, search costs, illegal immigrants, border controls, deportations, legalization, unemployment, wages
    Date: 2015–03
  4. By: Muhammet Bezirci (Selçuk University); Merve Oz (Selçuk University); Halenur Yılmaz (Selcuk University)
    Abstract: As a result of globalization, the financial relationships have increased between countries, markets have became integrated, investors have an opportunity to make profitable investments which will bring highest return wherever they want and also internet banking and electronic banking transactions have increased thanks to advanced technology and all these developments have accelerated money circulation, intrinsically these developments have been seen as positive but besides these developments, globalization has brought some costs like fraud, corruption, caused diffusion of crimes. In this respect money laundering is one these crimes and when it is described, dirty or black money which is derived from illegal activities after that this black money is tried to be appeared as legal money that is called as money laundering, so both the way of getting and legalizing this money constitutes a crime. Negative effect of money laundering can be examined within 4 topics; economic, moral, social and legal, and threats economic integrity, stability, reliability, and judicial order. Thus both developing and developed countries must seriously combat with this crime and find what the main reasons that facilitate realizing money laundering are and how it can be prevented.In this paper it is evaluated that the role of accountants and accounting practices abetting to money laundering, and how people use accountants while realizing this victimless crime and also what can be done to prevent money laundering with the help of accounting practices and how accounting practices can prevent money laundering.
    Keywords: Money Laundering, Black Money, Dirty Money, Anti-Money Laundering, Proceeds of Crime
    JEL: M41 M42 M48
    Date: 2014–12
  5. By: Asongu, Simplice
    Abstract: In this paper, we dissect with great acuteness contemporary insufficiencies of the IFS (2008) definition of the financial system and conclude from sound theoretical underpinnings and empirical justifications that the foundation, on which it is based, while solid for developed countries, holds less ground in developing countries. Perhaps one of the deepest empirical hollows in the financial development literature has been the equation of financial depth in the perspective of money supply to liquid liabilities. This equation has put on the margin (and skewed) burgeoning phenomena of mobile banking, knowledge economy (KE), inequality…etc. We conclude that the informal financial sector, a previously missing component in the IFS conception and definition of the financial system can only be marginalized at the cost of misunderstanding recent burgeoning trends in mobile phone penetration, KE and poverty. Hence, the IFS definition has incontrovertibly fought its final dead battle and lost in the face of soaring trends highlighted above. Despite the plethora of econometric and policy-making sins the definition has committed in developing countries through bias estimates and misleading inferences, may its soul RIP.
    Keywords: Banking; Mobile Phones; Shadow Economy; Financial Development; Poverty
    JEL: E00 G20 I30 O17 O33
    Date: 2014–01–11
  6. By: Konrad, Kai A.; Stolper, Tim
    Abstract: The success or failure of the fight against tax havens is the outcome of a coordination game between a tax haven and its potential investors. Key determinants are the costly international pressure and the haven country's revenue pool. The latter is determined endogenously by the decisions of many individual investors. Our findings explain why some havens attract large sources of international investment and earn large revenues while other countries do not, and why their profits are not competed away. We identify a trade-off between fighting tax havens and high tax rates or, similarly, small fines for disclosed tax evasion.
    Keywords: initiatives against harmful tax practices; tax evasion; tax havens
    JEL: G20 H26 H87
    Date: 2015–03
  7. By: Ronald B. Davies (University College Dublin); Julien Martin (Université du Québec à Montréal); Mathieu Parenti (Université Catholique de Louvain); Farid Toubal (Ecole Normale Supérierure de Cachan)
    Abstract: This paper analyzes the transfer pricing of multinational firms. We propose a simple framework in which intra-firm prices may systematically deviate from arm’s length prices for two motives: i) pricing to market, and ii) tax avoidance. Multinational firms may decide not to avoid taxes if the risk to be sanctioned is high compared to the tax gap. Using detailed French firm-level data on arm’s length and intra-firm export prices, we find that both mechanisms are at work. The sensitivity of intra-firm prices to foreign taxes is reinforced once we control for pricing-to-market determinants. Most importantly, we find almost no evidence of tax avoidance if we disregard exports to tax havens. Back-of-the-envelope calculations suggest that tax avoidance through transfer pricing amounts to about 1% of the total corporate taxes collected by tax authorities in France. The lion’s share of this loss is driven by the exports of 450 firms to ten tax havens. As such, it may be possible to achieve significant revenue increases with minimal cost by targeting enforcement.
    Keywords: Transfer pricing; Tax haven; Pricing to market
    JEL: F23 H25 H25 H32
    Date: 2015

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