nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2016‒03‒29
five papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Immigration, amnesties and the shadow economy By Emanuele Bracco; Luisanna Onnis
  2. Discrimination in a Search-Match Model with Self-Employment By Jonathan Lain
  3. A Bilateral Monopsony Approach to Lending, and the Hidden Economy in LDCs By Soldatos, Gerasimos T.
  4. Can electronic tax invoicing improve tax compliance ? a case study of the Republic of Korea's electronic tax invoicing for value-added tax By Lee,Hyung Chul
  5. Transfer pricing manipulation, tax penalty cost and the impact of foreign profit taxation By Rathke, Alex A. T.

  1. By: Emanuele Bracco; Luisanna Onnis
    Abstract: This paper investigates the effects of immigration and immigration amnesties on the shadow economy. We find a robust and positive relationship between the presence of immigrants and the unobserved economic activity at the local level, but the implementation of a large immigration amnesty substantially weakens this link. Our analysis exploits newly compiled datasets of Italian immigration and shadow economy estimates for the years 1995-2006, comprising a panel of local-level aggregate statistical information, and a micro-level survey of representative households. We exploit the discontinuity created by the 2002 immigration amnesty, which increased the stock of migrants by almost 50%.
    Keywords: Shadow Economy, immigration, Immigration policies, Amnesties
    JEL: H26 J61
    Date: 2016
  2. By: Jonathan Lain
    Abstract: In this paper, we build a search-match model to help explain differences in the outcomes of women and men in urban African labour markets. First, we use longitudinal data from a panel collected in four of Ghana's largest cities to establish a set of stylised facts relating to the size of different sectors in the economy, the earnings gaps that persist within those sectors, and transitions between different jobs. We then construct a model, which allows for individual heterogeneity and participation in both self- and wage-employment, as well as discrimination against female workers in the wage sector. By numerically solving and simulating this model, we show that wage sector discrimination leads to average earnings gaps in all sectors of the economy, even if the underlying ability distribution is the same for both sexes. This result arises because discrimination creates extra frictions for women, making it harder for them to select jobs according to comparative advantage. We also conduct a series of experiments to examine how women and men may be affected differently by government policy, and consider the robustness of our results to alternative assumptions about individual heterogeneity.
    Keywords: Search Models; Discrimination; Comparative Advantage; Self-Employment; Informal Sectors
    JEL: J60 J71
    Date: 2016
  3. By: Soldatos, Gerasimos T.
    Abstract: A model is presented in which one firm borrows from one bank with a positive supply curve of loans. The bank monitors firm’s output, which firm produces output underground too, in order to avoid this monitoring and minimize its marginal expenditure on loans by defaulting. The model incorporates also a laborer-consumer who allocates labor between the formal and informal sectors in a way preserving full employment. In this model, the following results obtain: There cannot be underground only economy even in the absence of government national-accounting induced output monitoring once part at least of the output has to be monitored by the bank. The capital employed officially is always more than that underground. Bank monopoly power induces lexicographic preferences towards underground economy income. The stability of the system depends on the relative size of the official to total capital ratio and the response of loan demand to the interest rate. The introduction of government and indirect taxation alter the optimal official to total capital ratio. Yet, the steady-state and stability of the system remain unchanged under a tax financed balanced budget. Government borrowing by a rent-seeking government or to cope with tax-evasion induced budget deficits lowers lending to the firm and leads thereby the system to equilibrium away from steady-state; but tax evasion increases such lending towards steady-state restoration.
    Keywords: Developing economies, Concentrated banking, Bilateral monopsony, Underground economy, Taxation
    JEL: D70 E26 H20 L10 O10
    Date: 2015
  4. By: Lee,Hyung Chul
    Abstract: This paper reviews the Republic of Korea's experience with electronic tax invoices for its value-added tax regime from the perspectives of tax policy makers and administrators. The paper evaluates Korea's implementation of electronic tax invoicing and analyzes its effect on tax compliance through enhanced transparency of business transactions and taxpayer services. First implemented in 2011, mandatory electronic tax invoicing has been credited with lowering tax compliance costs and raising the transparency of business transactions. Effective policy design and implementation have contributed to the country's success with electronic tax invoicing. Measured in transaction value, the electronic tax invoice adoption rate reached 99.8 percent in the first year and rose to 99.9 percent by 2013, compared with 15 percent before electronic tax invoicing became mandatory. According to a survey of taxpayers and tax practitioners in Korea that was conducted as part of this research study, 69.4 percent of the respondents agreed or strongly agreed that mandatory electronic tax invoicing has contributed to curbing value-added tax evasion by raising transaction transparency, and 72.9 percent agreed or strongly agreed that it has improved taxpayer service by facilitating the convenience of tax filing or automating the issuance of invoices. The review of Korea's experiences gives credence to the contention that well-planned and well-executed compulsory electronic tax invoices can materially enhance tax compliance through significant institutional and perceptual changes in tax administration.
    Keywords: Debt Markets,E-Business,Tax Law,Taxation&Subsidies,Emerging Markets
    Date: 2016–03–07
  5. By: Rathke, Alex A. T.
    Abstract: This paper analyzes the optimal level of transfer pricing manipulation when the expected tax penalty is a function of the tax enforcement and the market price parameter, and the multinational enterprise is subjected to distinct rules of foreign profit taxation. The application of the arm’s length principle implies the existence of a range of acceptable prices shaped by market, which influences the probability of tax penalization. It suggests that firms are able to manipulate transfer prices more freely if market price range is wide, or if its delimitations are difficult to determine. Home taxation of foreign profits can reduce income shifting incentive, depending on the portion of repatriation for tax purposes. We find that the limited tax credit rule tends to be a less efficient measure, nonetheless it is the most widely adopted rule by countries, so to spark the perspective of more powerful approaches for taxation of foreign profits.
    Keywords: income shifting,transfer pricing manipulation,foreign profit taxation,tax enforcement
    JEL: F23 H26
    Date: 2015–08–16

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