nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2017‒07‒16
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. How Do Entrepreneurial Portfolios Respond to Income Taxation? By Frank M. Fossen; Ray Rees; Davud Rostam-Afschar; Viktor Steiner
  2. Drivers of the Underground Economy around the Millienium: A Long Term Look for the United States By Goel, Rajeev K.; Saunoris, James W.; Schneider, Friedrich
  3. Illicit dealings: Fossil fuel subsidy reforms and the role of tax evasion and smuggling By Jun E Rentschler; Nobuhiro Hosoe
  4. Striking a balance: optimal tax policy with labor market duality By Gilbert Mbara; Ryszard Kokoszczynski; Joanna Tyrowicz
  5. Threats to Inclusive Growth in India: Unemployment and Informal Sector By Gupta, Avnesh Kumar
  6. Pricing Labour Capacity: The Unexpected Effects of Formalizing Employment Contracts in China By Enying Zheng; Simon Deakin
  7. Cash for Votes: Evidence from India By Anirban Mitra; Shabana Mitra; Arnab Mukherji

  1. By: Frank M. Fossen; Ray Rees; Davud Rostam-Afschar; Viktor Steiner
    Abstract: We investigate how personal income taxes affect the portfolio share of personal wealth that entrepreneurs invest in their own business. In a reformulation of the standard portfolio choice model that allows for underreporting of private business income to tax authorities, we show that a fall in the tax rate may increase investment in risky entrepreneurial business equity at the intensive margin, but decrease entrepreneurial investment at the extensive margin. To test these hypotheses, we use household survey panel data for Germany eliciting the personal wealth composition in detail in 2002, 2007, and 2012. We analyze the effects of personal income taxes on the portfolio shares of six asset classes of private households, including private business equity. In a system of simultaneous demand equations in first differences, we identify the tax effects by an instrumental variables approach exploiting tax reforms during our observation period. To account for selectioninto entrepreneurship, we use changes in entry regulation into skilled trades. Estimation results are consistent with the predictions of our theoretical model. An important policy insight is that lower taxes drive out businesses that are viable only due to tax avoidance or evasion, but increase investment in private businesses that are also worthwhile in the absence of taxes.
    Keywords: Taxation, entrepreneurship, portfolio choice, investment
    JEL: H24 H25 H26 L26 G11
    Date: 2017
  2. By: Goel, Rajeev K. (Illinois State University); Saunoris, James W. (Eastern Michigan University); Schneider, Friedrich (University of Linz)
    Abstract: This paper provides a long term analysis of the determinants of the shadow economy. Using data for the United States over the years 1870–2014 we examine economic and political factors driving the underground sector. Results show that among the economic factors, greater economic prosperity increased the shadow sector, while greater openness to trade and a bigger government reduced it, with the effects of inflation being statistically insignificant. Politically, the efficacy of presidential vetoes and the effect of congressional party homogeneity are statistically insignificant. Further, the U.S. shadow economy increased during both world wars, but was lower during the great depression. However, in the short run, the relationship between the shadow economy and its determinants exhibit some remarkable differences.
    Keywords: shadow economy, underground economy, determinants, taxation, inflation, openness, world war, great depression
    JEL: H26 K42
    Date: 2017–06
  3. By: Jun E Rentschler (University College London, Institute for Sustainable Resources, UK / Oxford Institute for Energy Studies, Oxford, UK / National Graduate Institute for Policy Studies, Tokyo, Japan); Nobuhiro Hosoe (National Graduate Institute for Policy Studies, Tokyo, Japan)
    Abstract: This study develops a computable general equilibrium model for Nigeria to study the impact of fossil fuel subsidy reform - and energy taxes - on key economic parameters, including consumption, income distribution, tax incidence, and fiscal efficiency. The model also examines the role of informality, tax evasion, and fuel smuggling, and shows that these factors can substantially strengthen the argument in favour of subsidy reform. The study shows that redistributing revenues from subsidy reform using uniform cash transfers has a strong progressive (i.e. pro-poor) distributional effect. Moreover, redistributing reform revenues by cutting pre-existing labour taxes not only increases fiscal effciency, but also reduces the welfare losses associated with tax evasion, which in turn reduces the welfare costs of reform by up to 40%. Regardless of the method of revenue redistribution, reducing subsidies diminishes the incentives for fuel smuggling, and hence the welfare losses associated with it.
    Date: 2017–07
  4. By: Gilbert Mbara (Group for Research in Applied Economics (GRAPE)); Ryszard Kokoszczynski (University of Warsaw; Narodowy Bank Polski); Joanna Tyrowicz (Group for Research in Applied Economics (GRAPE); University of Warsaw)
    Abstract: We develop a dynamic general equilibrium model in which firms may evade the employer contribution component of social security taxes by offering some workers "secondary contracts". When calibrated, the model yields estimates of secondary labor market participation consistent with empirical evidence for the EU14 countries and the US. We investigate the optimal mix of the avoidable and unavoidable components of labor taxes and analyze the fiscal and macroeconomic effects of bringing the composition to the welfare optimum. We find that partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare enhancing policy mix.
    Keywords: Laffer curve, tax evasion, labor market duality
    JEL: H2 H26 H3 E13 E26 J81
    Date: 2017
  5. By: Gupta, Avnesh Kumar
    Abstract: The creation of decent jobs outside of agriculture is one of the largest challenges that confront the policy makers trying to achieve ‘faster, sustainable and more inclusive growth’. The Indian economy has been growing at unprecedented rates, but it has been characterized by jobless growth and informatization of job opportunities in the organized sector. The paper attempts to evaluate the employment intensity of output growth through an examination of employment elasticity, and the potential for employment generation and decent work during the 12th Five Year Plan (2012-17).
    Keywords: jobless growth, organized-unorganized sectors, formal-informal employment, informalization, employment elasticity, decent employment
    JEL: E6 E61 O2
    Date: 2016–01–15
  6. By: Enying Zheng; Simon Deakin
    Abstract: This paper analyses the effects of recent laws formalising employment contracts in China, part of a wider policy to normalise features of an emerging market economy. Using a unique hand-collected dataset of 294 industrial injury claims handled by a labour dispute arbitration commission in 2010, we study the impact of having a formal contract on the amount of compensation paid to victims of workplace accidents. An inherent feature of the employment contract under a market economy is its incompleteness: because work-effort bargain and labour capacity cannot be accurately specified ex ante, the employer can expropriate the surplus from production ex post. The legally-driven formalisation of employment contracts is intended to redress this effect by holding the employer to the terms of the parties’ agreement and proving for third party enforcement. Our empirical analysis shows that having a written employment contract makes an injury claim more than twice likely to be arbitrated than mediated, in line with the intended effect of the law, but that it also leads to a reduction of around half in the amount of compensation awarded. Formalisation of employment contracts may reduce employer discretion during the course of the employment relationship, but it also makes it difficult for workers to invoke actual or customary wage levels for the purposes of putting a value on an accident compensation claim, in the face of the formal wage stated in the contract. Formalisation ends up reinforcing the hierarchical power of the employer which is a feature of capitalist work relations.
    Keywords: Contracts; labour valuation; emerging markets; China; injury compensation; wages
    JEL: J41 J83 K31 O43
    Date: 2016–06
  7. By: Anirban Mitra; Shabana Mitra; Arnab Mukherji
    Abstract: This paper investigates the prevalence of vote-buying in democratic elections where stringent restrictions on corporate donations to political parties exist. We combine data from state assembly elections in India with household-level consumer expenditure surveys (conducted by NSSO) over the period 2004-11. Exploiting a difference-in-differences methodology, we estimate the effects elections have on the consumption of various household items: food, clothes, education-related, etc. Moreover, there is heterogeneity in such consumption adjustments across households. Our estimates suggest that legal sources of funds are not sufficient for generating such "spikes" in consumption and indicate the role of the hidden economy in politics.
    Keywords: Political economy; election finance; black economy
    JEL: D12 D72 H40
    Date: 2017–06

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