nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2018‒02‒12
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Tax incentives and tax base protection in developing countries By Joosung Jun
  2. On asymmetric information and tax morale in developing countries By Salim Nuhu Ahmed; John M. Musah
  3. Occupational Choice and Investments in Human Capital in Informal Economies By Berniell, L
  4. Dynamic Analysis of a Disequilibrium Macroeconomic Model with Dual Labor Markets By Ogawa, Shogo
  5. Testing the Labor Market Dualism in Korea By Sungyup Chung; Sunyoung Jung
  6. Estimation of Formal and Informal Sectors in Social Accounting Matrix for the North Korean Economy (in Korean) By Jiyoung Choi
  7. Effects of Increasing Non-regular Workers on Wage Distribution: An Application of RIF Regressions (in Korean) By Chung Choe; Sungyup Chung

  1. By: Joosung Jun (Professor of economics, Ewha Womans University, Republic of Korea)
    Abstract: This paper considers the implications of using tax incentives for improving the tax base in developing countries, especially in the context of enforcement difficulties and international capital mobility. Noting that the tax structure in developing countries reflects pressures stemming from the large size of the informal sector and the prevalence of tax evasion in the formal sector, it suggests alternative channels through which the use of tax incentives can help protect the tax base, at least in the interim period. Governments can support the tax-paying local firms operating in the formal sector by providing tax incentives that appear to be more generous than warranted by their perceived effects on marginal investment, along with nontax benefits such as easier access to bank loans. In the process, foreign firms that are prone to tax evasion via profit shifting might be discriminated against, explicitly or implicitly, through a variety of regulations. In addition, the paper argues that the efficacy of investment incentives in attracting foreign investment is understated and the prospect of base erosion due to tax competition is overstated in the literature. The conventional prediction that the incentive effects increase with stronger investment climates may be technically correct, but seems to be too simplistic as a policy prescription. Smaller effects of investment incentives imply lower revenue costs unless these incentives are redundant. At the margin, therefore, tax incentives can possibly be wasted in countries with stronger investment climates, while they can be effective in countries with weak investment climates but strong rent potential such as natural resources or other locational advantages. Even countries with weak investment climates and low rent potential can still use such incentives as a signaling tool for prospective investors at a low revenue cost. The case study of Hong Kong, China; Singapore and Republic of Korea confirms that effective use of tax incentives critically hinges on country-specific factors and priorities, defying ‘one-size-fits-all’ best practices. In Hong Kong China, market-friendly investment environments, including a simple tax system with low and uniform rates, were a dominating factor to attract foreign investors. Singapore has been very proactive in providing foreign investors with generous tax incentives as part of investment-friendly environments, but has adjusted the extent of these incentives with their declining efficacy at the margin. In contrast, Republic of Korea provides a case in which countries with relatively weak investment climates can still make good use of tax incentives. The potential role of its tax incentives has sometimes been stretched beyond their purported goals, effectively serving as an incentive for firms not to shift their operations into the informal sector or abroad. This paper discusses various proposals that can reduce informal activity and tax evasion, which can also lead to a reduction in corruption. It also suggests that countries set statutory corporate tax rates in conformity with the neighboring countries with similar economic attributes in the face of increased profiting shifting by multinationals. Then, existing investment incentives can be adjusted in a most cost-effective way, taking into account country-specific characteristics such as general investment climates, the nature of local rents and the size of the informal sector as well as policy environments such as administrative capacity and the efficacy of the overall tax system.
    Keywords: Fiscal policy, public expenditure, revenues, taxation
    JEL: E62 H20 H50
  2. By: Salim Nuhu Ahmed; John M. Musah
    Abstract: Our paper investigates the implications of asymmetric non-tax revenue information for tax morale using micro data from thirty-six African countries. We utilize a model in which agents form their perceptions about the sufficiency of government non-tax revenue for development financing under asymmetric information conditions. We then construct a composite index of information access that generates predictions about these perceptions and tax morale at the household level. Two important predictions emerge: (i) in the presence of asymmetric information, households overestimate the ability of non-tax revenues alone to finance development, which (ii) has significant negative effects on household-level tax morale. Our findings—which are robust across specifications and controls of cross-country fixed differences in tax morale—provide evidence that improvement in government information supply regarding the use of non-tax revenues, beyond annual budget readings and households tax obligations, could significantly enhance tax morale and compliance.
    Date: 2018
  3. By: Berniell, L
    Abstract: Countries di er greatly in their levels of schooling and also in their rates of entrepreneurship. At the same time, the share of the so-called \shadow economy" -informal economic activities- is very large in some countries and very small in others. This paper explores some key channels that connect these three phenomena. In particular, it focuses on assessing whether the extent to which rms can hide from tax authorities -i.e., operate in the informal economy- may a ect the incentives of individuals to invest in human capital and also distort their occupational choices. The cross country data shows that the levels of educational attainment, rates of entrepreneurship and the level of informality are connected. First, across countries there is a positive association between rates of entrepreneurship and the sizes of the informal sector. Second, the di erence in the skill premium received by entrepreneurs and workers is negligible for economies with low levels of informality, while it becomes positive and increasing for more informal economies. Third, in more informal economies the fraction of high-skilled individuals that choose to become entrepreneurs is larger. Moreover, the share of the labor force that is skilled and the size of the informal economy are related in a non-linear way: for low levels of informality the share of skilled individuals rst decreases but then it rapidly stabilizes for countries with su ciently large informal sectors.
    Keywords: Economía, Jóvenes, Investigación socioeconómica, Políticas públicas,
    Date: 2017
  4. By: Ogawa, Shogo
    Abstract: We extend the general disequilibrium model of Malinvaud(1980) by using dual labor market theory. By considering two tiers of workers, we find that while the duality of the labor market expands an equilibrium regime in the short term, it does not always keep an equilibrium in the medium term. In the medium term, the business cycle converges toward a disequilibrium regime unless the goods market is potentially in equilibrium. Employment and wages at the steady state are affected by the size of the government, and the stability of wage bargaining is only a sufficient condition of the local stability of our dynamic system. Therefore, involuntary unemployment can be remedied only when goods demand is sufficiently large.
    Keywords: Disequilibrium macroeconomics; Non-Walrasian analysis; Segmented labor markets; Business cycles
    JEL: E12 E24 E32 J42
    Date: 2018–01–23
  5. By: Sungyup Chung (Macroeconomics Team, Economic Research Institute, The Bank of Korea); Sunyoung Jung (Macroeconomics Team, Economic Research Institute, The Bank of Korea)
    Abstract: The existence of the dual labor market in Korea is tested under the two different definitions of the labor market dualism. First, the estimation results from widely used tools such as Heckman's sample selection model support the existence of two wage equations, advocating the presence of labor market dualism in Korea. Second, the labor market dualism index suggested by Hudson (2007) supports that there is some degree of bifurcation between the good job conditions and bad job conditions.
    Keywords: Labor market, Labor market dualism, Sample bias correction
    JEL: C24 J31 J40 J81
    Date: 2016–10–10
  6. By: Jiyoung Choi (Economic Research Institute, The Bank of Korea)
    Abstract: The expansion of the informal sector is one of the most representative changes in North Korean economy since the 2000s. This paper estimates a social accounting matrix(SAM) that distinguishes between formal and informal activities of North Korea during the year of 2013 in order to understand its dual economic structure. As the estimation results, the share of informal sector in North Korea is estimated at 18.5% for factor income and 28.5% for final demand. Also, it indicates the production inducement effect of the informal sector in both household consumption and investment based on the Input-Output analysis. Increasing informal investment expenditure could contribute to encouraging the entire North Korean economy because the output multiplier of investment expenditure is much higher than that of household spending. Lastly it is worth to note that these estimation results are based on relatively rough assumptions due to the limited statistics of North Korean economy. Therefore, the results could be changed in case different assumptions are introduced regarding informal economic activities in North Korea.
    Keywords: Social accounting matrix, Informal economy, North Korean economy, Production inducement Effects
    JEL: C67 O17 P24
    Date: 2016–10–31
  7. By: Chung Choe (Hanyang University (ERICA)); Sungyup Chung (Economic Research Institute, The Bank of Korea)
    Abstract: This paper examines the effects of the expansion of non-standard work arrangements on the distribution of wage income. Specifically, we quantitatively estimate the effects of the increased proportion of non-regular workers among wage earners on each income quantile and subsequent changes in Gini coefficient by using the Recentered Influence Function (Firpo et al., 2009). According to the analysis on 2014 survey on the working conditions, the increase in non-regular workers negatively influence income inequality in Korea. It turns out that the rise in non-standard work arrangement aggravates overall income inequality not only by lowering the wages of low-wage workers, but also by improving the wages of high-wage workers.
    Keywords: Non-standard work arrangement, Wage differentials, RIF regression, Unconditional quantile regression
    JEL: D31 J31 J38 O17
    Date: 2016–12–05

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