nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2018‒09‒17
eight papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Size Dependent Policies, Informality and Misallocation By Era Dabla-Norris; Laura Jaramillo; Frederico Lima; Alexandre Sollaci
  2. Dealing with Illegal Immigration: the Role of Informality, Taxation and Trade By Carmen Camacho; Fabio Mariani; Luca Pensieroso
  3. Legal Attitudes Towards Informality on City Levels in China By Lu Shen; Kwong Wing Chau
  4. The value of health insurance: a household job search approach By Gabriella Conti; Rita Ginja; Renata Narita
  5. Tax Evasion with a Conscience By Dufwenberg, Martin; Nordblom, Katarina
  6. Tax Morale and the Role of Social Norms and Reciprocity: Evidence from a Randomized Survey Experiment By Doerrenberg, Philipp; Peichl, Andreas
  7. Draft Legislation of the German Government to Combat VAT Evasion in Ecommerce By Brettschneider, Jörg
  8. Why did people pay taxes? Fiscal innovation in Portugal and state making in times of political struggle (1500-1680) By Leonor Freire Costa; Paulo Brito

  1. By: Era Dabla-Norris; Laura Jaramillo; Frederico Lima; Alexandre Sollaci
    Abstract: We examine the effect of size-dependent policies in developing economies by focusing on a set of regulations that are applicable to firms with 20 or more formal employees in Peru. Firms can adjust to the regulations by (a) reducing their size, (b) shifting employment composition, or (c) splitting into subunits that fall below the regulatory threshold. We show that these actions are consistent with observed discontinuities in the distributions of firm size and employment composition. We extend the framework proposed by Garicano et al. (2016) to model and estimate the Peruvian economy and perform counterfactual exercises. Size-dependent regulations are costly for the economy, especially in the presence of labor market rigidities, and lead to lower aggregate wages, profits, and output. We also find that access to informal labor does not mitigate the economic impact of the size-dependent regulations, as the increase in informal employment is largely offset by a decline in formal employment.
    Keywords: Productivity;Employment;Underground economy;Unemployment;Wages;size-dependent policies, misallocation, informality, General, Informal Economy
    Date: 2018–08–02
  2. By: Carmen Camacho (PARIS SCHOOL OF ECONOMICS and CNRS); Fabio Mariani (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Luca Pensieroso (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: We develop a two-good, three-sector model of a small open economy with illegal immigration and both formal and informal production. In this framework, we explore the consequences of fiscal policy and trade openness for illegal immigration and the shadow economy. We find that (i) the effect of trade openness on illegal immigration crucially depends on the degree of substitutability between native and illegal labor in the informal sector, (ii) the reach of fiscal policy goes beyond its traditional domain: fiscal instruments can be effectively used as immigration policy tools.
    Keywords: Illegal immigration; Informal sector; Shadow economy; Taxation; Immigration policy; Globalisation; Open economy
    JEL: O17 F22 J61
    Date: 2018–05–20
  3. By: Lu Shen; Kwong Wing Chau
    Abstract: Informal housing are housing units without legal title. Despite the lack of legal title, there is a huge black market for informal housing in China. Though it is clearly stated in the law that such transactions are prohibited by the law, in reality, under the pressure of high formal housing prices, the transactions of informal housing have never stopped. Since the informal property rights transferred in those transactions are neither recognized nor protected by the legal institution, disputes arise from these transactions. Different from foreign countries such as the United States, each state of which has its own law and legal system, China practices a unified legislative system. Under the system, various administrative regions may work out local statutes as long as they do not violate the Constitution or the state law or the administrative law. Though the marketization and transactions of informal housing in China is illegal according to the law, there is no criminal conviction on illegal selling or buying. Different from illegal behaviour such as drug selling, disputes over illegal selling of informal housing can always seek legal decisions from courts. Nonetheless, among the disputes over contract validity, ownership, or even will validity where informal housing is involved, different court decisions have been given to similar disputes over the transactions of informal housing though one of the national administrative law has clearly stated the prohibitions of transactions of informal housing in China. Despite under the uniform legal system in China and referring to the same national laws including contract law and relevant administrative law, courts in different cities interpret and practice laws in various manners and even lead to opposite decisions, suggesting certain ambiguity in the legislations. This study aims to explore court decisions and local statutes if there is any, which are relevant to informal housing issues in various cities and provinces in China. Court decisions in a way can reflect where legal institutions stand in the cases of informal housing issues and the variety of decisions given by the courts based on almost the same statues and legislations also imply a certain degree of ambiguity and flexibility in interpretation, which may also contribute to the pricing and transaction volume of informal housing units in real life.
    Keywords: China; Court cases; Informal Housing; Law; Property Rights
    JEL: R3
    Date: 2018–01–01
  4. By: Gabriella Conti (Institute for Fiscal Studies and University College London); Rita Ginja (Institute for Fiscal Studies and University of Bergen); Renata Narita (Institute for Fiscal Studies)
    Abstract: Do households value access to free health insurance when making labor supply decisions? We answer this question using the introduction of universal health insurance in Mexico, the Seguro Popular (SP), in 2002. The SP targeted individuals not covered by Social Security and broke the link between access to health care and job contract. We start by using the rollout of SP across municipalities in a differences-indifferences approach, and find an increase in informality of 4% among low-educated families with children. We then develop and estimate a household search model that incorporates the pre-reform valuation of formal sector amenities relative to the alternatives (informal sector and non-employment) and the value of SP. The estimated value of the health insurance coverage provided by SP is below the government’s cost of the program, and the corresponding utility gain is, at most, 0.56 per each peso spent.
    Keywords: Search, Household behavior, Health insurance, Informality, Unemployment
    Date: 2018–07–30
  5. By: Dufwenberg, Martin (University of Arizona, University of Gothenburg); Nordblom, Katarina (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: How do moral concerns affect tax compliance and the need for audits? We propose answers by exploring an inspection game, modified to incorporate belief-dependent taxpayer guilt, unawareness, and third-party audience effects. Novel conclusions are drawn regarding whose behavior is affected by moral concerns (it's the authority's more than the citizen's) and regarding policy, in particular fines vs. jail, the role of information campaigns, and the use of a principle of public access whereby tax returns are made public information.
    Keywords: tax evasion; guilt; inspection game; policy
    JEL: D03 H26 H83
    Date: 2018–08
  6. By: Doerrenberg, Philipp (ZEW Mannheim); Peichl, Andreas (Ifo Institute for Economic Research)
    Abstract: We present the first randomized survey experiment in the context of tax compliance to assess the role of social norms and reciprocity for intrinsic tax morale. We find that participants in a social-norm treatment have lower tax morale relative to a control group while participants in a reciprocity treatment have significantly higher tax morale than those in the social-norm group. This suggests that a potential backfire effect of social norms is outweighed if the consequences of violating the social norm are made salient. We further document the anatomy of intrinsic motivations for tax compliance and present first evidence that previously found gender effects in tax morale are not driven by differences in risk preferences.
    Keywords: tax compliance, tax evasion, intrinsic motivations, tax morale, social norms, reciprocity
    JEL: H20 H32 H50 C93
    Date: 2018–07
  7. By: Brettschneider, Jörg
    Abstract: The German federal government presented a legislative proposal on tax- and especially VAT law with the focus to combat VAT fraud in (international) ecommerce on July 31st 2018. This draft legislation is explained and discussed.
    Keywords: VAT,Umsatzsteuer,Mehrwertsteuer,Value Added Tax,China,Germany,Deutschland,ecommerce,e-commerce,Steuerhinterziehung,tax evasion,tax,Amazon,FBA,Fulfillment,liability rule,UK,Asia,Chinese sellers,chinesische Händler,Alibaba,online platform,electronic marketplace,Onlinehandel,UStG,Umsatzsteuergesetz,legislation,Finanzamt Neukölln,Fulfillment by Amazon,Umsatzsteuerbetrug,Steueroase,Entwurf eines Gesetzes zur Vermeidung von Umsatzsteuerausfällen beim Handel mit Waren im Internet und zur Änderung weiterer steuerlicher Vorschriften,Finanzministerkonferenz,Thomas Schäfer,Jörg Brettschneider,Brettschneider,Shenzhen,Marktplatzhaftung,HMRC,Steuernummer
    JEL: K1 F10
    Date: 2018
  8. By: Leonor Freire Costa; Paulo Brito
    Abstract: This paper considers growing fiscal capacity of the European early modern states as contingent to taxpayer’s consent in higher tax loads. It puts forward the hypothesis that war damages were the main factor guiding the taxpayer’s cost-benefit assessment of consenting or violently resisting to a fiscal innovation. To test the hypotheses, we consider data on Portugal in times of political struggle against the Habsburgs to restore and keep the political autonomy after 1640. The war was financed by an entirely new, universal income tax, remaining in the Portuguese fiscal system well until the liberal revolution in 1820, although enforced by a decentralized and nonspecialized administration. A model derives the optimal tax rate from the standpoint of the taxpayer as a function of war intensity, risk aversion, and awareness that evasion would enhance war damages. Data on damages, contemporary assessments of the tax base, and amounts enforced allow the model’s calibration. Results suggest the accuracy of the hypothesis and draw the conclusion that taxpayers’ utility in paying the new tax determined the e?ective tax rate (tax enforced). This paper claims that ultimately improvements in the fiscal capacity of states needed taxpayer’s perception of high levels of destruction, hence any political regime in early modern Europe must have found in war damages a persuasive argument to make e?ective a fiscal innovation. The other contribution of this case study is pointing out the advantage of the assignment of the tax collection to local, non-professional administration, for the endurance of a fiscal system, which incorporated an income tax that withstood the liberal revolution. It enhanced the role of peer monitoring and turned out to be an e?ective way of instilling social norms contributing to build up the taxpayer’s liability, which somehow the liberal state in 19th century exploited within a di?erent technological environment.
    Keywords: Portugal, early modern economies, income tax, state capacity JEL classification: N13, H31, H26
    Date: 2018

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