nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2015‒09‒18
three papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Do Small Businesses Respond to an Increase in the Probability of a Tax Audit? Evidence from a Policy Reform in Italy By Alessandro Santoro
  2. Tax Evasion across Industries: Soft Credit Evidence from Greece By Nikolaos Artavanis; Adair Morse; Margarita Tsoutsoura
  3. Entrepreneurial Activities in Europe - Informal Entrepreneurship By Marco Marchese

  1. By: Alessandro Santoro
    Abstract: This paper uses a panel of administrative data concerning 71,000 Italian small businesses observed in tax years 2005-2008. The aim of the paper is to evaluate the impact of a reform of audit rules implemented in 2006. The reform repealed a special audit exemption previously granted to businesses which adopted a stringent accounting standard. It is shown that the reform increased the level of economic activity, as measured by the value of inventory, for the generality of businesses involved. However, an increase in profits and turnover was reported only by the subset of businesses which were more likely to perceive it as an increase in the probability of an audit. This result is in line with the predictions of the Allingham-Sandmo model and it casts some doubts on the possibility to reduce evasion by limiting the opportunities of manipulating accounting books.
    Keywords: Tax Evasion by Small Businesses, Audit Probabil- ity, Accounting Standard
    JEL: H25 H26 H32
    Date: 2015–09
  2. By: Nikolaos Artavanis; Adair Morse; Margarita Tsoutsoura
    Abstract: We document that in semiformal economies, banks lend to tax-evading individuals based on the bank's assessment of the individual's true income. This observation leads to a novel approach to estimate tax evasion. We use microdata on household credit from a Greek bank, and replicate the bank underwriting model to infer the banks estimate of individuals' true income. We estimate that 43%-45% of self-employed income goes unreported and thus untaxed. For 2009, this implies 28.2 billion euros of unreported income, implying foregone tax revenues of over 11 billion euros or 30% of the deficit. Our method innovation allows for estimating the industry distribution of tax evasion in settings where uncovering the incidence of hidden cash transactions is difficult using other methods. Primary tax-evading industries are professional services — medicine, law, engineering, education, and media. We conclude with evidence that contemplates the importance of institutions, paper trail and political willpower for the persistence of tax evasion.
    JEL: G21 H26
    Date: 2015–09
  3. By: Marco Marchese
    Abstract: This policy brief was produced by the OECD and the European Commission. This policy brief focuses on the informal self-employed and informal entrepreneurs, which together comprise what we define as “informal entrepreneurship”. The policy brief provides estimates of the size of the informal economy and informal entrepreneurship in the EU, investigates its main causes and impacts on the economy, and finally presents a policy framework for formalisation strategies based on the distinction between deterrence, incentives and persuasion measures.
    Date: 2015–07

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