nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2015‒08‒13
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Does an Uncertain Tax System Encourage "Aggressive Tax Planning"? By James Alm
  2. Estimating the "Tax Gap" at the State Level: The Case of Georgia's Personal Income Tax By James Alm; Kyle Borders
  3. Tax Basis Determinations, Pass-Through Entities, and Taxpayer Noncompliance By James Alm; Jay A. Soled
  4. Who is audited? Experimental study on rule-based tax auditing schemes By Yoshio Kamijo; Takehito Masuda; Hiroshi Uemura
  5. Bound To Lose, Bound To Win? The Financial Crisis and the Informal-Formal Sector Earnings Gap in Serbia By Blunch, Niels-Hugo
  6. Optimal Taxation and Public Provision for Poverty Reduction By Kanbur, Ravi; Pirttilä, Jukka; Tuomala, Matti; Ylinen, Tuuli
  7. International Tax Cooperation and Implications of Globalization By Leonce Ndikumana

  1. By: James Alm (Department of Economics, Tulane University)
    Abstract: "Aggressive tax planning" (ATP) is typically characterized as a tax scheme that reduces the effective tax rate of a particular type of income to a level below the one sought by fiscal policy for this income. One motivation often suggested for its use is the uncertainty in tax liabilities introduced by a complicated and ever changing tax system. In this paper, I examine the impact of an uncertainty on the use of such tax schemes; by implication, I also examine how a simpler and more stable tax system that reduced this uncertainty might affect ATP. In this analysis, I draw upon some of my own work on tax avoidance and tax evasion, and then I extend this work to the related but separate area of ATP. Importantly, I introduce and model both individual and group motivations, incorporating insights from behavioral economics in these new analyses. Taxpayers are clearly motivated in part by narrowly defined financial considerations as shaped by the tax, audit, and penalty rates that they face, all of which I classify as individual motivations. However, individuals are also often influenced by many other factors that go beyond self-interest and that have as their main foundation some aspects of social norms, morality, altruism, fairness, or the like. In their entirety, I lump these factors together as group motivations, and I argue that they are shaped by the dynamic social context in which, and the process by which, decisions emerge. My main conclusion is that there is much in theory to suggest that uncertainty leads to more use of ATP, especially when both individual and group motivations are considered.
    Keywords: tax avoidance, tax evasion, uncertainty, risk, behavioral economics, experimental economics
    JEL: H2 H26 D03 C9
    Date: 2014–02
  2. By: James Alm (Department of Economics, Tulane University); Kyle Borders
    Abstract: Most studies of the so-called ``tax gap'' (or the amount of taxes that should be collected but are not) focus on national taxes. This study provides several estimates of the ``tax gap'' for the State of Georgia’s personal income tax. The methods use different estimation strategies for each of the three main components (underreporting of income, underpayment of tax liability, and nonfiling of a tax return), and then sum these separate estimates of the tax gap components to yield a range of estimates of the total tax gap in Georgia. The estimated range of the personal income tax gap is \$1.4 billion to \$2.9 billion, for a voluntary compliance rate that ranges from 89.8 percent to 80.8 percent. This study also provides some rough but suggestive estimates of the distributional effects of noncompliance, which indicate that noncompliance as a proportion of income may well be higher in lower income classes.
    Keywords: tax gap, tax evasion, public budgeting, forecasting
    JEL: H2 H26 H61 H68 H71 H83
    Date: 2014–05
  3. By: James Alm (Department of Economics, Tulane University); Jay A. Soled (Rutgers School of Business, Rutgers University)
    Abstract: In the United States, one of the most popular ways to conduct business is to use a pass- through entity such as a partnership, limited liability company, or S corporation. Investor taxpayers in such pass-through entities commonly hold their ownership interest for years or decades. Over this lengthy period of time, a taxpayer’s tax basis in the entity is subject to constant annual adjustments, which generally have no immediate tax consequences. However, when the pass-through entity investment is later sold or liquidated, tax basis determinations are of critical importance, and these determinations enable taxpayers to calculate their concomitant gains or losses. At this pivotal juncture, accurately determining taxpayers’ tax bases in these investments is highly unlikely, and the IRS’s ability to detect taxpayers’ tax basis reporting inaccuracies is virtually nonexistent. This analysis examines the phenomenon of taxpayers who do not know their tax basis in pass-through entity investments and the consequences associated with such ignorance. Also provided are projected revenue losses associated with taxpayers purposefully or inadvertently inflating the tax basis that they have in their pass-through entity investments. To curtail the projected revenue losses associated with tax basis misreporting, we propose several reform measures that Congress should adopt. Such measures include simplifying tax basis computations, enhancing information reporting, and limiting the ability of taxpayers to estimate the tax basis of their pass-through investments.
    Keywords: tax basis, pass-through entities, information reporting
    JEL: H2 H26 K34 K42
    Date: 2014–07
  4. By: Yoshio Kamijo (School of Economics and Management, Kochi University of Technology); Takehito Masuda (Japan Society for the Promotion of Science); Hiroshi Uemura (School of Economics and Management, Kochi University of Technology)
    Abstract: In this study, we employ a game theoretic framework to formulate and analyze tax audit schemes. We test the theoretical predictions in a laboratory experiment. We compare audit schemes based on three audit rules: random audit rule, cut-off audit rule, and lowest income reporter audited rule (LIRA). While the cut-off audit rule is known to be optimal in theory, it has not been examined in a controlled laboratory experimental setting. The primary experimental finding is that LIRA rule yields the highest degree of truthful reporting among the rules, contrary to the theory. Moreover, the regression analysis shows that individual social norms regarding tax payment as well as the cut-off rule and the LIRA significantly increase the degree of truthful reporting. Our experimental finding that the LIRA yields the highest degree of truthful reporting is practically important because the tax authority in most countries assigns higher priority for enhancing tax compliance.
    Keywords: audit schemes, tax evasion, laboratory experiment, cut-off rule, lowest income reporter audited rule
    JEL: C91 D81 H26
    Date: 2015–07
  5. By: Blunch, Niels-Hugo (Washington and Lee University)
    Abstract: While the informal sector has received widespread attention in academic and policy arenas in recent decades, knowledge gaps and controversies remain. First, while the evidence is starting to emerge, there is still more to learn about the formal-informal sector earnings gap of the former Socialist regimes of Eastern Europe and Central Asia. Second, the widespread debate in both academic and policy circles of what constitutes "the" informal sector has led to substantial controversy and different definitions. Third, our knowledge is scarce regarding the impact of the current financial crisis on labor markets – both formal and informal. By examining the incidence and determinants of the formal-informal sector earnings gap for adult male dependent employees using two identical, nationally representative labor force surveys for Serbia – one just prior to the impact of the recent international financial crisis and one about a year into the crisis – for three alternative measures of informality, this paper adds to our understanding in all three of these dimensions. Among the main results is the finding of a substantively large formal-informal sector gap (favoring the formal sector), which appears to have decreased substantially overall following the crisis. Additional results suggest that formal sector workers are concentrated in better paying industries and occupations and have more education and other favorable characteristics than informal sector workers, and at the same time also have higher returns to their (already favorable) characteristics overall, with education and part-time status consistently among the main drivers of the observed gap.
    Keywords: detailed earnings decomposition, earnings decomposition, labor market segmentation, formal-informal sector earnings gap, international financial crisis, Serbia
    JEL: I24 J31 J42
    Date: 2015–07
  6. By: Kanbur, Ravi; Pirttilä, Jukka; Tuomala, Matti; Ylinen, Tuuli
    Abstract: The existing literature on optimal taxation typically assumes there exists a capacity to implement complex tax schemes, which is not necessarily the case for many developing countries. We examine the determinants of optimal redistributive policies in the context of a developing country that can only implement linear tax policies due to administrative reasons. Further, the reduction of poverty is typically the expressed goal of such countries, and this feature is also taken into account in our model. We derive the optimality conditions for linear income taxation,commodity taxation, and public provision of private and public goods for the poverty minimization case, and compare the results to those derived under a general welfarist objective function. We also study the implications of informality on optimal redistributive policies for such countries, and comment on the potential for minimum wage regulation. The exercise reveals non-trivial differences in optimal tax rules under the different assumptions. The derived formulae also capture the sufficient statistics that the governments need to pay attention to when designing poverty alleviation policies.
    Keywords: commodity taxation; income taxation; poverty; public good provision; redistribution
    JEL: H21 H40 O12
    Date: 2015–07
  7. By: Leonce Ndikumana
    Abstract: Recent developments in globalization raise important issues regarding taxation policy and economic development. First, trends in capital income tax raise concerns about a possible race to the bottom or harmful competition. Second, lack of tax policy coordination results in large losses in tax revenue due to profit shifting by multinational corporations. These practices undermine revenue mobilization in the least developed countries, which also suffer from capital flight and other forms of illicit financial flows. This paper discusses how improved governance of the global financial system and enhanced harmonization in taxation policies may help address these important development problems.
    Keywords: Taxation; tax evasion; globalization; saving; capital; economic development
    JEL: E21 H26 O16 O19 F13
    Date: 2014–12

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