nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2016‒11‒27
four papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Optimal fiscal policy in the presence of VAT evasion: the case of Bulgaria By Vasilev, Aleksandar
  2. A Taxonomy of Colombia’s Informal Labor Market By Cristina Fernández; Leonardo Villar
  3. Estimating the Size of Black Economy in India By Sharma, Chandan
  4. Décloisonner l’analyse des données pour appuyer la modernisation des douanes : une illustration à partir du Gabon By Joel Cariolle; Cyril Chalendard; Anne-Marie Geourjon; Bertrand Laporte

  1. By: Vasilev, Aleksandar
    Abstract: This paper explores the effects of fiscal policy in an economy based on indirect taxes, and in the presence of VAT evasion channel. In addition, the government is taxing all income at the same rate. The focus of the paper to compare and contrast two regimes - the exogenous (observed) vs. optimal (Ramsey) policy case. The results are evaluated in light of consumption vs. income taxation debate, the issue of optimal provision of valuable public services, and the effect of fiscal policy on the size of VAT evasion. To this end, a Real-Business-Cycle model, calibrated to Bulgarian data (1999-2014), is augmented with a government sector. Bulgarian economy was chosen as a case study due to its dependence on consumption taxation as a source of tax revenue, and the prevalence of VAT evasion. The main findings from the computational experiments performed in the paper are: (i) The optimal steady-state income tax rate is zero; (ii) The benevolent Ramsey planner provides the optimal amount of the utility- enhanc- ing public services, which are now three times lower; (iii) The optimal steady-state consumption tax needed to finance the optimal level of government spending is twice lower, as compared to the exogenous policy case.
    Keywords: consumption tax,income tax,VAT evasion,general equilibrium,fiscal policy,Bulgaria
    JEL: D58 H26
    Date: 2016
  2. By: Cristina Fernández; Leonardo Villar
    Abstract: A taxonomy of the informal labor market is extremely important to understand and handle informality, particularly in a country as Colombia where this phenomenon is large and heterogeneous. As we will argue in this paper, it is possible to identify four different types of informality, according to the reasons to be informal: low productivity of the worker (subsistence informality), barriers to formality (induced informality), choice (voluntary informality) and both choice and low productivity (mixed informality). The policy recommendations to handle informality varies according to the target type of informality. While induced informality might be reduced by the removal of formal employment barriers or by the implementation of active policies to reduce segregation in society, structural informality requires other kinds of policies, such as a focus on improving educational outcomes. Similarly, in the case of voluntary informality, providing economic incentives to formalize and controlling informality might be more effective, whereas mixed informality is more related to wrong incentives created by social benefits. In this paper we propose a methodology to identify the four types of informality to the case of Colombia that follows what we did in Fernandez et al. (2016) but with greater emphasis on the education level. Although the correspondence is far from perfect, we show that in general terms, informal workers with primary education or less can be classified in the Subsistence informality group, informal workers with secondary education can be included in the Induced informality group, informal workers with tertiary education or more can be treated as Voluntary informal workers and informal workers with middle school education can cover mixed informality. Hence, the policy recommendations to handle informality among each education group are different.
    Keywords: Informalidad, Nivel educativo, Mercado Laboral, Recomendaciones de política, Colombia
    JEL: J21 J68 I24
    Date: 2016–11–17
  3. By: Sharma, Chandan
    Abstract: The issue of black economy is a hotly debated issue in India and it has been the key target of policy action from last four decades. The debate is further fueled by demonetization of higher currency notes in the country. In this context, we estimate the size of black economy in India for the period 1970-2013. A currency demand approach is adopted for this purpose. The test of structure break indicates for a break in the system therefore we employ Johansen et al. (2000) cointegration test. For estimating the empirical model we utilize fully modified ordinary least squares (FMOLS) for taking care the endogeneity problem. The estimates indicate that the Indian economy has a sizable black economy. Specifically, in the last estimated year, 2013, it is computed to be US$957 billion or 52% of the Indian GDP. Nevertheless, since early 1990s, perhaps because of a range of fiscal reforms, it has been decreasing. In the light of these findings, policy implications are brought out.
    Keywords: Black economy; taxation; structural break; India
    JEL: C22 H26 O17
    Date: 2016–11–20
  4. By: Joel Cariolle (FERDI - Fondation pour les Etudes et Recherches sur le Développement International - FERDI); Cyril Chalendard (CERDI - Centre d'études et de recherches sur le developpement international - CNRS - Centre National de la Recherche Scientifique - Université d'Auvergne - Clermont-Ferrand I); Anne-Marie Geourjon (FERDI - Fondation pour les Etudes et Recherches sur le Développement International - FERDI); Bertrand Laporte (CERDI - Centre d'études et de recherches sur le developpement international - CNRS - Centre National de la Recherche Scientifique - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: Over the last few years, customs authorities in many developing countries have introduced modern risk management techniques relying on data mining and statistical scoring techniques. By demonstrating that risk analysis in customs may be a valuable tool to facilitate legal trade and combat fraud more effectively, these techniques have helped improving the performance of customs authorities. However, these risk management techniques may prove to be inefficient in a context of moral hazard and low-performance customs administration. One way to address this weakness is to rely on information gained from discrepancies in bilateral trade statistics. The analysis of discrepancies in bilateral trade statistics (or mirror analysis) is increasingly used to identify high-risk import operations and to estimate revenue losses. By comparing data on fraud recorded by the Gabon customs administration with discrepancies in Gabon’s bilateral trade data, this paper highlights the benefits for a customs administration of a joint analysis of fraud records and mirror trade statistics data, the latter being indicative of the fraud remaining to be detected. Such an analysis helps customs to target ex post audits on risky import declarations unadjusted by the frontline customs officer. Finally, we point that analyzing jointly data on fraud records and mirror trade statistics data may be useful to (i) identify imported products for which the fraud remaining to be detected is large and (ii) monitor the performance of customs inspections.
    Keywords: Customs risk analysis,Performance of customs authorities,Customs fraud,Tax evasion,Administrative data,Mirror analysis.
    Date: 2016–10–31

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