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on Informal and Underground Economics |
| By: | Alessandro Di Nola (University of Konstanz); Georgi Kocharkov (Goethe University Frankfurt); Almuth Scholl (University of Konstanz); Anna-Mariia Tkhir (University of Konstanz) |
| Abstract: | There is a sizable overall tax gap in the U.S., albeit tax non-compliance differs sharply across income types. While only small percentages of wages and salaries are underreported, the estimated misreporting rate of self-employment business income is substantial. This paper studies how tax evasion in the self-employment sector affects aggregate outcomes and welfare. We develop a dynamic general equilibrium model with incomplete markets in which heterogeneous agents choose between being a worker or self-employed. Self-employed agents may hide a share of their business income but face the risk of being detected by the tax authority. Our model replicates important quantitative features of the U.S. economy in terms of income, wealth, self-employment, and tax evasion. Our quantitative ndings suggest that tax evasion leads to a larger self-employment sector but it depresses the average size and productivity of self-employed businesses. Tax evasion generates positive aggregate welfare effects because it acts as a subsidy for the self-employed. Workers, however, suffer from substantial welfare losses. |
| Keywords: | Tax evasion, Self-employment, Wealth inequality, Tax policy |
| JEL: | H24 H25 H26 C63 E62 E65 |
| Date: | 2018–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1806&r=iue |
| By: | Collen Lediga; Nadine Riedel; Kristina Strohmaier |
| Abstract: | In 2008 and 2014, the South African Revenue Service (SARS) did snapshot synchronizations of its business tax registry with the country’s commercial register in an attempt to identify firms that are non-compliant with their obligation to register with SARS for business tax purposes. We analyse these interventions drawing on SARS’s business tax registry and the population of business tax returns between 2009 and 2014. Several findings emerge. First, in both years, the comparisons resulted in the identification of around 300,000 non-compliant taxpayers, providing prima facie evidence of significant extensive-margin tax evasion. The interventions significantly raised South African business tax revenues in the following years despite the fact that the identi-fied ‘extensive-margin evaders’ exhibit a lower propensity to submit tax returns and, conditional on return submission, report less income than comparable entities that voluntarily registered with SARS. The analysis further suggests that the observed gap in reported taxable income relates to underlying differences in firm size and corporate profitability rather than intensive-margin tax evasion. In line with ‘missing middle theories’, extensive-margin evaders that submit tax returns are, moreover, found to exhibit increased sales and asset growth after their forced registration with SARS. |
| Keywords: | tax evasion, less developed countries, tax administration |
| JEL: | H20 H70 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7117&r=iue |
| By: | Engström, Per (Department of Economics and UCFS, Uppsala University, Sweden); Nordblom, Katarina (Department of Economics and CeCAR, University of Gothenburg, Sweden, and UCFS, Uppsala University); Stefánsson, Arnaldur (Department of Economics, UCFS and UCLS, Uppsala University) |
| Abstract: | We study what determines taxpayers’ deduction behavior when filing tax returns. Preliminary 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 empirical 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: | 2018–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uunewp:2018_008&r=iue |
| By: | Gillitzer, Christian (University of Sydney); Sinning, Mathias (Australian National University) |
| Abstract: | This paper provides theoretical and empirical evidence on the implications of the timing of reminders by studying the effect of varying the timing of reminder letters to taxpayers on their payment behavior. The collection of unpaid tax debts constitutes a considerable challenge for tax authorities. We show that varying the timing of a reminder letter has a theoretically ambiguous effect on tax payments. We study the payment behavior of business taxpayers in a field experiment in Australia and find that a simple reminder letter increases the probability of payment by about 25 percentage points relative to a control group that does not receive a letter from the tax authority. However, variation over a three-week period in the timing of the reminder letter has no effect on the probability of payment within seven weeks of the due date. Our findings indicate that sending reminders early results in faster payment of debts with no effect on the ultimate probability of payment. |
| Keywords: | tax compliance, business taxation, natural field experiment, behavioral insights |
| JEL: | C93 H25 H26 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11599&r=iue |
| By: | Mughal, Khurrum; Schneider, Friedrich; Hayat, Zafar |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:87812&r=iue |
| By: | Jean-Pierre Cling (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique); Mireille Razafindrakoto (LEDa - Université Paris Dauphine (Paris 9)); François Roubaud (LEDa - Université Paris Dauphine (Paris 9)) |
| Abstract: | Labour market segmentation is usually defined as the division of the labour markets into separate submarkets or segments, distinguished by different characteristics and behavioural rules (incomes, contracts, etc.). The economic debate on the segmentation issue has been focusing in developed countries, and especially in Europe, on contractual segmentation and dualism. However, in developing countries such as Vietnam which is the focus of this study, wage work is marginal and the approach to labour market segmentation is necessarily slightly different. Indeed, most workers are engaged in the informal economy and many of them are self-employed in their own household business. Starting with an analysis of the main characteristics of the national labour market, this paper presents a survey of the literature on informality and labour market segmentation in Vietnam (section 2). Section 3 describes the institutional background related to firm registration and social protection in Vietnam, and analyses the reasons for informality in relationship with the institutional framework. Section 4 describes the reforms being put in place and employment strategies related to the informal economy. Policy recommendations are proposed in the last section. |
| Abstract: | La segmentation sur le marché du travail est usuellement définie comme la coexistence de deux segments ou secteurs qui se distinguent par leurs caractéristiques et les comportements qui y prévalent (niveau de revenus, contrats, etc.). Le débat économique sur la segmentation s'est focalisé dans les pays développés, et en particulier en Europe, sur le dualisme résultant des contrats. Cependant, dans les pays en développement comme le Vietnam, les emplois salariés étant marginaux, la segmentation sur le marché du travail doit nécessairement être appréhendée de manière différente. La majorité des emplois relève de l'économie informelle et une grande partie est constituée d'auto-emploi dans des entreprises individuelles. Partant d'une analyse des principales caractéristiques du marché du travail national, ce document présente ensuite une revue de la littérature sur l'informalité et la segmentation sur le marché du travail au Vietnam (section 2). La section 3 décrit le cadre institutionnel en matière d'enregistrement et de protection sociale au Vietnam, et analyse les raisons de l'informalité. La section 4 examine les réformes qui ont été mises en place et les stratégies en termes d'emploi touchant l'économie informelle. Enfin, des recommandations politiques sont proposées dans la dernière section. |
| Keywords: | segmentation,Labour market,Informality,Vietnam,Informel,marché du travail |
| Date: | 2017–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01653653&r=iue |
| By: | Jean-Pierre Cling (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique); Mireille Razafindrakoto (LEDa - Université Paris Dauphine (Paris 9)); François Roubaud (LEDa - Université Paris Dauphine (Paris 9)) |
| Abstract: | This article sets out to investigate the reasons why some household businesses decide to register and become formal (while others do not) in order to shed light on the origins of informality. We use qualitative as well as quantitative data on household businesses (HB) derived from first-hand representative surveys implemented in Hanoi and Ho Chi Minh city. The study reveals that although most of the informal businesses operate ‘illegally', this is more due to unclear registration legislation than the mark of a deliberate intention to evade the economic regulations.Among the different factors which influence the registration decisions, the reason for setting up the business appears to be a determining one: the more it is a real choice (businesses set up to be independent or to follow a family tradition) and the less a constraint (set up for lack of an job alternative), the more the HB is more inclined to be registered. Furthermore, the analysis highlights that incentives do prove decisive insofar as the probability of having a formal business is greater among HB heads who consider that registration provides at least partial protection from corruption. Besides, access to information, the market and large business orders also drive the informal entrepreneurs to register. These results stress the need for clarification of the legal framework as well as incentive policies in order to address the issue of informality. |
| Abstract: | Cet article se propose d'analyser les raisons pour lesquelles certaines unités de production (household businesses, HB) décident de s'enregistrer et de devenir formelles (et pourquoi d'autres ne le font pas) afin d'éclairer les origines de l'informalité. Nous mobilisons des données aussi bien quantitatives que qualitatives sur les HB, issues d'enquêtes représentatives et de première main conduite par nos soins à Hanoï et Ho Chi Minh ville. L'étude révèle que bien que la plupart des unités informelles opère "illégalement", ce trait procède plus d'une législation floue et méconnue que d'une volonté délibérée d'échapper aux régulations publiques. Parmi les différents facteurs qui jouent sur la décision de s'enregistrer, le motif qui a conduit à s'établir à son compte est déterminant : plus il s'agit d'un véritable choix (volonté d'échapper au salariat ou par tradition familiale) et moins il résulte d'une contrainte (manque d'alternative d'emploi), et plus le chef d'unité sera enclin à s'enregistrer. De plus, l'analyse met en évidence le rôle des incitations dans la probabilité de devenir formel. Ainsi, ceux qui considèrent que l'enregistrement protège (au moins partiellement) de la corruption sont plus nombreux à régulariser leur situation. Enfin, l'accès à l'information, aux marchés et aux commandes des grandes entreprises favorisent l'enregistrement. Ces résultats soulignent le besoin de clarification de la législation des entreprises ainsi que l'importance de politiques incitatives pour s'attaquer à la question de l'informalité. |
| Keywords: | Informal Sector,Vietnam,Registration,Corruption,Incentives |
| Date: | 2017–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01664202&r=iue |
| By: | Guillermo Cruces (CEDLAS-FCE-UNLP, CONICET.); Guido Porto (FCE-UNLP); Mariana Viollaz (CEDLAS-FCE-UNLP) |
| Abstract: | This paper studies the link between trade reforms and labor informality in Argentina using a long time series spanning the 1980-2001 period. We explore cross-section mechanisms, that operate at the industry level, and time-series mechanisms, that operate at a general equilibrium level. We argue that firms can substitute formal with informal workers to smooth a negative trade shock. In this setting, industries exposed to larger tariffs cuts could experience increases in informality. In general equilibrium, there can be additional aggregate impacts in both manufacturing and non-traded sectors through workers reallocation between sectors, wage adjustments, and firm entry and exit. Using the cross-section variation of the data and an instrumental variable strategy we explore empirically the cross-section mechanisms. We find that reductions in industry tariffs increase labor informality, and the effect is differentially stronger in industries with a larger share of small size firms. Using the time-series variation of the data, we are able to identify some of the general equilibrium effects. We find that the fall in the average national tariff decreased aggregate informality in the manufacturing sector but increased it in the non-traded sector. |
| JEL: | F13 F14 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:dls:wpaper:0229&r=iue |
| By: | Fudge, Judy.; Hobden, Claire. |
| Abstract: | Domestic workers have long provided a range of services for families from cleaning and cooking to caring for children, the elderly and disabled, to driving household members and tending gardens. Despite the crucial services they provide, in many countries, domestic work is characterised by a high incidence of informal arrangements and contributes significantly to informality especially among women. The level of organization of the domestic work sector varies dramatically from country to country. In some countries, domestic workers are hired informally, by word of mouth, through social networks. In other countries, intermediaries – such as agencies, digital platforms, coops and others – play a role in recruiting, placing, and employing domestic workers. As the role of these intermediaries increases, questions arise about the impact intermediaries have on formalizing domestic work and providing decent work for domestic workers. |
| Keywords: | domestic worker, recruitment, employment service, private employment agency, informal employment, decent work |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ilo:ilowps:994989393002676&r=iue |