nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2018‒05‒07
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Commitment to pay taxes: Results from field and laboratory experiments By Koessler, Ann-Kathrin; Torgler, Benno; Feld, Lars P.; Frey, Bruno S.
  2. The effects of official and unofficial information on tax compliance By Filomena Garcia; Luca David Opromolla; Andrea Vezzulli; Rafael Marques
  3. Social norms and tax compliance: Experiments and theory By López Pérez, Raúl; Ramírez Zamudio, Aldo.
  4. Increasing tax transparency: Investor reactions to the country-by-country reporting requirement for EU financial institutions By Dutt, Verena K.; Ludwig, Christopher A.; Nicolay, Katharina; Vay, Heiko; Voget, Johannes
  5. Global distribution of revenue loss from tax avoidance - Re-estimation and country results By Cobham, Alex; Janský, Petr
  6. Tax Enforcement and Tax Policy: Evidence on Taxpayer Responses to EITC Correspondence Audits By John Guyton; Kara Leibel; Dayanand S. Manoli; Ankur Patel; Mark Payne; Brenda Schafer
  7. Multiple Misbehaving:Loss Averse and Inattentive to Monetary Incentives By Engström, Per; Nordblom, Katarina; Stefansson, Arnaldur
  8. Does Tax Evasion Affect Economic Crime? By Amedeo Argentiero; Bruno Chiarini; Elisabetta Marzano
  9. Understanding Informal Financing By Allen, Franklin; Qian, Meijun; Xie, Jing

  1. By: Koessler, Ann-Kathrin; Torgler, Benno; Feld, Lars P.; Frey, Bruno S.
    Abstract: The ability of a tax authority to collect taxes successfully depends on both its relationship with taxpayers and how strongly these taxpayers are committed to contributing to the common good. We present field and laboratory experimental evidence on a new non-intrusive approach aimed at fostering the commitment to pay taxes. Using a between-subject design in a unique field setting, we analyze whether tax compliance changes if taxpayers receive an offer to promise paying their taxes on time. Taxpayers who complied with the promise entered into a lottery with the chance of winning either a financial or a non-financial reward. Rewards were also offered in response to compliance only (i.e., without being asked to make a formal promise) allowing us to disentangle a pure reward effect from the commitment effect. As potential legal obstacles prevented us from developing a treatment that allowed for identifying whether the promise itself changes behavior, we designed and conducted a laboratory experiment to test this proposition. In the field experiment, taxpayers with a history of being compliant are more likely to make a promise. Similarly, the laboratory experiment indicates that individuals with higher tax morale are more compliant and more likely to make the promise. In addition, for all promise schemes, compliance is significantly higher for the promise-makers as compared to subjects in the control group and to those who did not make a promise. The field experiment indicates that commitment can improve payment behavior. This effect, however, is strongly dependent on the type of reward to which the promise is linked. Compliance increases only if the reward is non-financial. A no compliance effect is observed if cash is offered in return for promise fulfilment. A strong compliance effect for pure non-financial rewards was also obtained in the laboratory experiment.
    Keywords: tax compliance,field experiment,commitment,promise,supportive incentives,psychological contract
    JEL: H26 C93 C91 A13
    Date: 2018
  2. By: Filomena Garcia; Luca David Opromolla; Andrea Vezzulli; Rafael Marques
    Abstract: The administration of tax policy has shifted its focus from enforcement to complementary instru- ments aimed at creating a social norm of tax compliance. In this paper we provide an analysis of the effects of the dissemination of information regarding the past degree of tax evasion at the social level on the current individual tax compliance behavior. We build an experiment where, for given levels of audit probabilities, fines and tax rates, subjects have to declare their income after receiving either a communication of the official average tax evasion rate or a private message from a group of ran- domly matched peers about their tax behavior. We use the experimental data to estimate a dynamic econometric model of tax evasion. The econometric model extends the Allingham–Sandmo–Yitzhaki tax evasion model to include self-consistency and endogenous social interactions among taxpayers. We find four main results. First, tax compliance is very persistent. Second, the higher the official past tax evasion rate the higher the degree of persistence: evaders are more likely to evade again, and compli- ant individuals are more likely to comply again. Third, when all peers communicate to have evaded (complied) in the past, both evaders and compliant individuals are more likely to evade (comply). Fourth, while both treatments, and especially the unofficial information treatment, are associated, in the context of our experiment, with a significantly larger growth in evasion intensity, the aggregate effect depends on the characteristics of the population. In countries with inherently low levels of tax evasion, official information can have beneficial effects by consolidating the behavior of compliant in- dividuals. However, in countries with inherently high levels of tax evasion, official information can have detrimental effects by intensifying the behavior of evaders. In both cases, the impact of official information is magnified in the presence of strong peer effects.
    Keywords: Tax morale, Information, Tax evasion, Experiment, Peer Effects
    JEL: H26 D63 C24 C92 Z13
    Date: 2018–04
  3. By: López Pérez, Raúl (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.); Ramírez Zamudio, Aldo. (Center for Economics, Banking and Finance Studies, Department of Economics, Universidad de Lima.)
    Abstract: We report data from an experiment in Peru where subjects anonymously decide how much of their endowment they donate to the Peruvian Government. The standard rational choice model and several well-known models of non-selfish preferences predict zero giving. Yet we observe that around 75% of the subjects give something (N = 164), with substantial heterogeneity. Our data is consistent with an account based on social norms: If compliance is not too costly, people comply with norms if (i) they perceive that such behavior sufficiently promotes social welfare and (ii) others are expected to respect norms as well (peer effects). Our paper contributes to a recent literature on tax morale emphasizing the importance of non-standard motivations on tax compliance and suggests that taxpayers are willing to give money to the government (e.g., paying taxes) if they believe that enough others give as well and that taxes are not wasted or ‘stolen’ by the government, but used to promote social welfare.
    Keywords: corruption, evasion, peer effects, social norms, tax compliance, tax morale
    JEL: C92 D91 H21 H26 H3
    Date: 2018–04
  4. By: Dutt, Verena K.; Ludwig, Christopher A.; Nicolay, Katharina; Vay, Heiko; Voget, Johannes
    Abstract: We employ an event study methodology to investigate the stock price reaction around the day of the political decision to include a country-by-country reporting obligation for EU financial institutions. We do not find significant abnormal returns for the banks affected. Sample splits according to the effective tax rate and the degree of B2C orientation do not reveal a more pronounced negative investor response for banks engaging more strongly in tax avoidance or being potentially more concerned about reputational risks, respectively. We conclude that the implementation of a CbCR requirement for EU financial institutions did not trigger a noticeable investor response. Contrary prior findings regarding other public tax disclosure obligations might be driven by the distinct motivation of the rules and the way the information is presented. We contend that capital market reactions to an upcoming increase in tax transparency are not generalizable to other industries and settings, but that consideration must be given to the context and the exact design of the rule.
    Keywords: Tax Avoidance,Profit Shifting,Country-by-Country Reporting,Financial Institutions,Market Reaction
    JEL: H25 H26 G21 G28
    Date: 2018
  5. By: Cobham, Alex; Janský, Petr
    Abstract: International corporate tax is an important source of government revenue, especially in lower-income countries. An important recent study of the scale of this problem was carried out by International Monetary Fund researchers Ernesto Crivelli, Ruud De Mooij, and Michael Keen. We first re-estimate their innovative model, and then explore the effects of introducing higher quality revenue data from the ICTD–WIDER Government Revenue Database. Whereas Crivelli et al. report results for two country groups only, we present country-level results to make the most detailed estimates available. Our findings support a somewhat lower estimate of global revenue losses of around US$500 billion annually and indicate that the greatest intensity of losses occurs in low- and lower middle-income countries, and across sub-Saharan Africa, Latin America and the Caribbean, and South Asia
    Keywords: Governance,
    Date: 2017
  6. By: John Guyton; Kara Leibel; Dayanand S. Manoli; Ankur Patel; Mark Payne; Brenda Schafer
    Abstract: Each year, the United States Internal Revenue Service (IRS) sends notices to selected taxpayers who claim Earned Income Tax credit (EITC) benefits to request additional documentation to verify those claims. This paper uses administrative tax data to examine the impacts of these correspondence audits on taxpayer behavior. The quasi-experimental research design compares randomly-selected audited taxpayers to taxpayers with similar risk scores who were not selected for a correspondence audit. The results indicate that, in the years following an audit, there are decreases in the likelihoods of claiming EITC benefits and filing returns. Taxpayers with self-employment income at the time of audit appear likely to increase wage employment following a correspondence audit, while taxpayers with wage income at the time of audit appear likely to decrease labor force participation following disallowance of EITC benefits. The results for wage earners indicate labor force participation elasticities of roughly 0.03.
    JEL: H24 J20
    Date: 2018–03
  7. By: Engström, Per (Department of Economics and UCFS, Uppsala University, Sweden); Nordblom, Katarina (Department of Economics, School of Business, Economics and Law, Göteborg University); Stefansson, Arnaldur (Department of Economics, UCFS and UCLS, Uppsala University, Sweden)
    Abstract: We study what determines taxpayers’ deduction behavior when filing tax returns. Pre-liminary deficits might be viewed as losses assuming zero preliminary balance as reference point. Swedish taxpayers may escape these losses by claiming deductions after receiving information about the preliminary balance. Furthermore, the Swedish income tax system has a substantial kink (20 percentage points) where the central government tax applies. Taxpayers slightly above the governmental tax kink have substantially higher (standard economic) incentives to claim deductions than taxpayers slightly below the kink. Using a regression kink and discontinuity approach with individual fixed effects, we study a panel of 4.1 million Swedish taxpayers in 1999 to 2006. We find strong causal effects of preliminary deficits on the probability of claiming deductions. The initial em-pirical evidence for a kink in deduction probability at the central government threshold, anticipated by standard economic theory, is weaker but significant. However, a more detailed analysis reveals that the kink at the tax threshold is not likely due to the tax incentives per se. When controlling for the preliminary tax deficit, the kink at the tax threshold disappears. Taxpayers just above the tax kink are namely more likely to run a preliminary tax deficit than those just below it. Hence, the most plausible explanation also for the kink at the tax threshold is therefore loss aversion and not standard economic incentives. The Swedish taxpayers are thus “misbehaving”, in a Thaler (2015) sense, on two separate margins: they are highly loss averse but surprisingly inattentive to standard monetary incentives.
    Keywords: tax compliance; loss aversion; prospect theory; quasi-experiment; regression kink; regression discontinuity
    JEL: C21 D91 H24 H26
    Date: 2018–04
  8. By: Amedeo Argentiero; Bruno Chiarini; Elisabetta Marzano
    Abstract: This paper examines the impact of tax evasion on criminal activities in Italy. Specifically, we consider three types of crime that are related to economic determinants: property crimes (including robbery, theft and car theft), fraud and usury. We estimate a dynamic panel using annual data from the Italian provinces (NUTS-3) for the 2006-2010 period and show that tax evasion positively affects economic crimes. Notably, the elasticity of tax evasion to fraud is related to the size of the tax burden; in addition, these crimes demonstrate different levels of persistence over time, reflecting different adjustment costs. Finally, we find that property crimes, fraud and usury are not influenced by deterrence or clearing-up variables.
    Keywords: property crime, usury, fraud, tax evasion, deterrence effect
    JEL: C33 H26 K42
    Date: 2018
  9. By: Allen, Franklin; Qian, Meijun; Xie, Jing
    Abstract: This paper offers a framework to understand informal financing based on mechanisms to deal with asymmetric information and enforcement. We find that constructive informal financing such as trade credits and family borrowing that relies on information advantages or an altruistic relationship is associated with good firm performance. Underground financing such as money lenders who use violence for enforcement is not. Constructive informal financing is prevalent in regions where access to bank loans is extensive, while its role in supporting firm growth decreases with bank loan availability. International comparisons show that China is not an outlier but rather average in using informal financing.
    Keywords: asymmetric information; Firm Growth; Informal financing; social collateral
    JEL: G21 G30 O16 O17
    Date: 2018–04

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