nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2017‒05‒07
four papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Productivity, Taxation and Evasion: An Analysis of the Determinants of the Informal Economy By Alessandro Di Nola; Georgi Kocharkov; Aleksandar Vasilev
  2. Trade and Poverty Issues: A Country Case Study of the Philippines By Sta. Romana, Leonardo L.
  3. The Revenue Efficiency of India’s Sub-National VAT By Astha Sen; Sally Wallace
  4. Do Rewards Work?: Evidence from the Randomization of Public Works By Paul Carrillo; Edgar Castro; Carlos Scartascini

  1. By: Alessandro Di Nola (University of Konstanz, Germany); Georgi Kocharkov (University of Konstanz, Germany); Aleksandar Vasilev (Department of Economics, American University in Bulgaria)
    Abstract: We evaluate the relative importance of labor productivity versus income taxes and social contributions for tax compliance in an economy with a large degree of informality. Empirical evidence points out that tax evasion in Europe happens through partially concealing wages and profits in formally registered enterprises. To this end, we build a model in which employeremployee pairs of heterogeneous productive capacities make joint decisions on the degree of tax evasion. The quantitative model takes as inputs the income tax structure and social contributions. The model is used to analyze the case of Bulgaria which has the largest informal economy in Europe. The estimation strategy relies on matching the empirical series for the size of the informal economy and other aggregate outcomes for 2000-2014. Our counterfactual experiments show that the most important factor for the changing size of the informal economy is labor productivity, which accounts for more than 75% of the change. The variation in corporate income tax accounts for the rest. Changes in personal income tax levels and progressivity are found not to be quantitatively relevant for tax evasion. We also characterize optimal taxation in 2014 with respect to minimizing tax evasion. The productive gains of imposing optimal taxes are small.
    Keywords: Informal economy, progressive taxation, tax evasion, flat tax reform
    JEL: H24 H25 H26 C63 E62 E65
    Date: 2017–04
  2. By: Sta. Romana, Leonardo L.
    Abstract: This study begins with an overview of the poverty situation in the Philippines. It then takes a brief look at the poor in the rural areas, followed with a discussion of the poor in the informal sector. It then brings these two sectors together, with an examination of the poor and the urban/rural and formal/informal divides. It concludes with a discussion of the relationship among trade, poverty and the structural transformation of the Philippine economy.
    Keywords: Rural,informal sector,Asia,South East Asia,development economics,structural transformation,economic liberalization,economic openness,inclusive growth,unemployment,underemployment
    Date: 2017
  3. By: Astha Sen (Microeconomics, Sonoma State University); Sally Wallace (Department of Economics, Andrew Young School of Policy Studies, Georgia State University)
    Abstract: The rise of the value-added tax (VAT) has undoubtedly been one of the most significant tax developments since its inception in 1954 in France. The main reason for the popularity of the VAT is its efficiency over other types of indirect taxes. Not only does it eliminate production inefficiencies associated with the turnover tax, it also is generally thought to be superior to retail sales taxes as they are more vulnerable to evasion and avoidance and they may lack a “self-policing” aspect of administration. The self-policing of the VAT has a higher probability of exposing forged accounts and an informal economy than the retail sales tax (Bird 2005 and Agha et al 1996). Primarily for the same reason, a VAT is generally regarded as a more promising consumption tax for developing countries where the size of the informal sector is large. However, opponents of the VAT do not quite agree. Some studies argue that the opposite is true. For example, Emran and Stiglitz (2005) show that in the presence of a substantial ‘informal’ sector, the VAT that falls on the formal sector acts to deter the growth and development of the economy as a whole. Also, the retail sales tax may be cheaper to administer since there are fewer taxpayers and thus it is less complicated. Despite these contradictory views, the VAT has replaced some version of a retail sales tax regime in many developing countries and it continues to do so.
    Date: 2017–04
  4. By: Paul Carrillo; Edgar Castro; Carlos Scartascini
    Abstract: This paper evaluates the effect of positive inducements on tax behavior by exploiting a natural experiment in which a municipality of Argentina randomly selected 400 individuals among more than 72,000 taxpayers who had complied with payment of their property tax. These individuals were publicly recognized and awarded the construction of a sidewalk. Results indicate that: i) being selected in the lottery and publicly recognized by the government has a positive but not persistent effect on future compliance; ii) receiving the sidewalk has a large positive and persistent effect; iii) high and persistent spillover effects exist: some neighbors of those who receive the reward comply more too, and these effects can be even larger than the direct effects; and iv) there is no financial motive effect; i.e., people do not pay their taxes just to participate in the lottery. Recognition serves only as a short-term incentive, but the provision of a durable and visible good has more persistent and broader effects. These findings provide evidence on features that make a positive inducement more successful, whether for tax compliance or other policy purposes.
    Keywords: Public Works, Tax compliance, Public Services, Tax Rate, Public Policy, Tax incentives, public works, sidewalk renovation, sidewalk construction, reciprocity
    JEL: D62 H23 H42 C93
    Date: 2017–04

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