nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2018‒06‒25
ten papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Tax Evasion on a Social Network By Gamannossi degl’Innocenti, Duccio; Rablen, Matthew D.
  2. What Might an Agenda for Equitable Taxation Look Like? By Prichard, Wilson
  3. Do tax information exchange agreements curb transfer pricing-induced tax avoidance? By Diller, Markus; Lorenz, Johannes
  4. Myths and Numbers on Whistleblower Rewards By Nyrerod, Theo; Spagnolo, Giancarlo
  5. Shadow Economy in Pakistan: Its Size and Interaction with Official Economy By Mughal, Khurrum; Schneider, Friedrich
  6. Costa Rica; Technical Assistance Report-Revenue Administration Gap Analysis Program-Tax Gap Analysis for General Sales and Corporate Income Tax By International Monetary Fund
  7. Employment Targeting in a Frictional Labor Market By Ghate, Chetan; Mazumder, Debojyoti
  8. Workers in the informal sector and contributory social insurance schemes?the case of Tanzania By Flora Myamba
  9. Making growth more inclusive in Thailand By Lara Fleischer; Adam Bogiatzis; Hidekatsu Asada; Vincent Koen
  10. Family Ceremonies as a Constraint on Informal Sector Investment: The Case of Sénégal By Bennett, John; Levy, Stephanie

  1. By: Gamannossi degl’Innocenti, Duccio (University of Exeter); Rablen, Matthew D. (University of Sheffield)
    Abstract: We relate tax evasion behavior to a substantial literature on self and social comparison in judgements. Taxpayers engage in tax evasion as a means to boost their expected consumption relative to others in their "local" social network, and relative to past consumption. The unique Nash equilibrium of the model relates optimal evasion to a (Bonacich) measure of network centrality: more central taxpayers evade more. The indirect revenue effects from auditing are shown to be ordinally equivalent to a related Bonacich centrality. We generate networks corresponding closely to the observed structure of social networks observed empirically. In particular, our networks contain celebrity taxpayers, whose consumption is widely observed, and who are systematically of higher wealth. In this context we show that, if the tax authority can observe the social network, it is able to raise its audit revenue by around six percent.
    Keywords: tax evasion, social networks, network centrality, optimal auditing, social comparison, self comparison, habit, indirect effects, relative consumption
    JEL: H26 D85 K42
    Date: 2018–05
  2. By: Prichard, Wilson
    Abstract: The past decade has witnessed an unprecedented surge in international attention to the challenge of expanding tax collection in developing countries; this accelerated in 2017. This has, however, come with a risk that too little attention will be given to how that revenue is raised, with potential perverse impacts on the poor. It is correspondingly very important to put an equal emphasis on tax equity, and there has been significant recent movement in that direction. But the notion of tax equity raises difficult questions. There is no single right definition of the term. It is very hard to measure precisely the distributional effects of taxation and fiscal activities, especially in low-income countries where compliance is highly imperfect, relevant statistics are few and sometimes inaccurate, and where poorer people in particular may be obliged to pay significant informal, unrecorded taxes. And what is best in abstract may be limited by both technical and political constraints. This brief seeks to clarify definitions, evidence and points of potential disagreement, and to suggest key elements of a potential future agenda: (1) stronger and broader personal income taxes, (2) more effective and simplified property taxes, (3) transparency around tax exemptions, (4) improved taxation of multinational corporations (MNCs), (5) reducing opportunities and incentives for informal taxation, (6) pairing consumption taxes with simple exemptions for essential goods, (7) efforts to expand civic engagement around tax issues and strengthen fiscal contracts, and (8) reasonable efforts to balance potentially poverty-increasing taxes with new transfers.
    Keywords: Governance,
    Date: 2018
  3. By: Diller, Markus; Lorenz, Johannes
    Abstract: We propose a game theoretical model where a multinational company with divisions in two countries and the respective tax authorities interact with each other. Prior to an audit the functional profile of the divisions is unknown to the tax authorities. In equilibrium, tax avoidance emerges in both countries. It turns out that the audit pressure is highest for firms with a hybrid functional profile, dampening their production and reducing their after-tax profit. We find that introducing a bilateral Tax Information Exchange Agreement reduces tax avoidance by aggressive transfer pricing in the high-tax ("domestic") country and precludes tax avoidance in the lowtax ("foreign") country. The volume of production increases. The foreign tax authority discontinues its audit activities, while the domestic tax authority audits less often at least if the foreign division is a toll manufacturer ("routine function"). While the expected net tax revenues increase in the foreign country, they may decrease in the domestic country.
    Keywords: transfer pricing,tax evasion,cooperation
    JEL: H26 F23 K34
    Date: 2017
  4. By: Nyrerod, Theo; Spagnolo, Giancarlo
    Abstract: Whistleblower rewards have been used extensively in the US to limit procurement fraud and tax evasion, and their use has been extended to fight financial fraud after the recent financial crisis. There is currently a debate on their possible introduction in Europe, but authorities there appear considerably less enthusiastic than their US counterparts. While it is important that these tools are scrutinized in a lively democratic debate, many things have been written - even by important institutional players - that have no empirical backing or that are in open contrast to the available evidence from independent research. In this paper we review some of the most debated issues regarding the potential benefits and costs of financial incentives for whistleblowers, while trying to separate existing evidence from conjectures with no empirical support, and myths in contrast to available evidence.
    Keywords: Corruption; Financial incentives; fraud; law enforcement; retaliation; tax evasion; whistleblower protection; Whistleblower rewards
    JEL: G38 K20 K42 L40 M41
    Date: 2018–05
  5. By: Mughal, Khurrum; Schneider, Friedrich
    Abstract: Shadow economy encompasses wide array of activities that influence the official economy and government policies, either directly or indirectly. In this paper we estimate the shadow economy of Pakistan using currency demand approach with two econometric approached, i.e. one using Auto Regressive Distributed Lag (ARDL) model and two with Engel Granger two step approach. Additionally, we use a variant of currency demand approach where along with tax variable we include unemployment rate and intensity of government control as indicator variables of shadow economy, for the first time in case of Pakistan. The average shadow economy of Pakistan estimated from 1973-2015 as percentage of GDP is 26.41, 25.29, and 26.11 from Models 1, 2, and 3 respectively. Furthermore, we analyzed interaction between the official and shadow sector using ARDL model. Our results show a significantly increasing shadow economy in Pakistan with positive impact on the official sector in long run while negative impact in the short run. This again is a novelty in our paper where we observe short and long run impacts separately along with dynamic simulations to show Pakistan’s GDP per Capita in the absence of shadow economy.
    Keywords: Shadow Economy, Pakistan, Impact of the official Sector, Currency Demand Approach
    JEL: E26 H26 K42 O17
    Date: 2018–05–30
  6. By: International Monetary Fund
    Abstract: This report presents the estimates of tax gaps for general sales tax (GST) and corporate income tax (CIT) in Costa Rica by applying the methodology of the IMF’s RA-GAP (Revenue Administration – Gap Analysis Program). Main findings for GST gap The RA-GAP GST gap methodology was used to estimate the compliance gap and the policy gap for the general sales tax (GST) in Costa Rica for the years from 2012 to 2016. Potential GST revenue under current policy is referred to here as PVC; the difference between PVC and net accrued collections is defined as the compliance gap. The difference between potential revenue under a theoretical GST structure applying the standard rate to all final consumption without any exemptions (referred to as PVR) and PVC is called the policy gap (Figure 1).
  7. By: Ghate, Chetan; Mazumder, Debojyoti
    Abstract: Governments in both developing and developed economies play an active role in labor markets in the form of providing both formal public sector jobs and employment through public workfare programs. We refer to this as employment targeting. In the context of a simple search and matching friction model, we show that the propensity for the public sector to target more employment can increase the unemployment rate in the economy and lead to an increase in the size of the informal sector. Employment targeting can therefore have perverse effects on labor market outcomes.
    Keywords: Search and Matching Frictions, Labor Markets, Employment, Informal Sector, Public Sector.
    JEL: D83 O17 O20
    Date: 2018–05–29
  8. By: Flora Myamba (IPC-IG)
    Abstract: "The report by the Organisation for Economic co-Operation and Development (OECD) entitled 'Social Protection in East Africa: Harnessing the Future' (OECD 2017), recently produced by the European Union Social Protection Systems (EU-SPS) project, points to the low coverage rates of social protection in the informal sector in East Africa as one of seven great challenges that will need to be addressed in the next 50 years. For years now, many developing countries in sub-Saharan Africa have been poor and vulnerable, with high rates of informality in their labour markets: the majority of both rural populations involved in agriculture and the urban poor work in the informal sector. Public-sector social protection mechanisms have remained weak or even non-existent; therefore, the burden to protect the population from risks and social and economic shocks has been placed on the families and communities themselves?and mainly on women. This is the essence of traditional (and informal) social protection in sub-Saharan Africa, the perception of which has been used to justify the low resources allocated to this sector in government-led policies and programmes". (...)
    Keywords: Workers, informal sector, contributory, social insurance, schemes, case, Tanzania
    Date: 2017–09
  9. By: Lara Fleischer (OECD); Adam Bogiatzis (OECD); Hidekatsu Asada (OECD); Vincent Koen (OECD)
    Abstract: The People pillar of the 2030 Agenda for Sustainable Development focuses on quality of life in all its dimensions, and emphasises the international community’s commitment to ensuring all human beings can fulfil their potential in dignity, equality and good health. Thailand’s path from a low-income to an upper-middle-income country over recent decades is widely hailed as a development success story. Poverty has fallen impressively and inequality is on a downwards trend, but more efforts are needed to reduce still widespread informality and persistent, substantial regional inequalities, and to further improve living standards, especially for those who currently work informally. To achieve these objectives, the government needs to: (i) consider tax and regulatory measures to encourage formalisation; (ii) boost the participation rates of informal workers in social protection schemes; (iii) expand adequate social safety nets for poor households and the elderly; (iv) prepare the healthcare system for an ageing and modernising society; and (v) improve the education system, particularly in rural areas. Gaps also remain in ensuring women’s political participation and reducing gender-based violence. This Working Paper relates to the 2018 Initial Assessment report of the Multi-dimensional Country Review of Thailand ( imensional-review-thailand.htm)
    Keywords: demographic change, education, gender equality, health care, inclusive growth, inequality, informality, labour market, pensions, poverty, regional development, social protection, well-being
    JEL: H55 I00 I12 I13 I18 I21 I25 I28 I30 I38 J08 J10 J26
    Date: 2018–05–30
  10. By: Bennett, John (Royal Holloway, University of London); Levy, Stephanie (London School of Economics)
    Abstract: We analyze how intermittent large expenditures on family ceremonies may affect an entrepreneur's investment decision in an informal enterprise. Our hypothesis is that the barrier between family and enterprise is thin and permeable. We test this hypothesis using a survey from Sénégal that combines informal sector and household data. We estimate a measure of exposure to spending on births, weddings and funerals, and show this has a significant negative relationship with the decision to invest and the amount of investment. These results are robust to changes in specifications of the determinants of investment, controlling for both enterprise- and family-related variables.
    Keywords: informality, investment behaviour, family ceremonies
    JEL: O17 D13 O12
    Date: 2018–05

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