nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2018‒10‒08
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. A Game of Tax Evasion: evidences from an agent-based model By L. S. Di Mauro; A. Pluchino; A. E. Biondo
  2. Fiscal structural reforms: the effect of card payments on vat revenue in the euro area By George Hondroyiannis; Dimitrios Papaoikonomou
  3. Linking Tax Morale and Personal Income Tax in Spain By Pilar Rey del Castillo; Jaime Villanueva-Garcia
  4. Is the Devil in the Shadow? A Reexamination of the Relationship between Institutions and Income By Pavlik, Jamie Bologna; Williams, Ryan Blake
  5. The Rich Underreport their Income: Assessing Bias in Inequality Estimates and Correction Methods using Linked Survey and Tax Data By Sean Higgins; Nora Lustig; Andrea Vigorito
  6. Productivity Growth and Levels - A comparison of Formal and Informal Manufacturing in India By K. L. Krishna; Bishwanath Goldar; Suresh Chand Aggarwal; Deb Kusum Das; Abdul A. Erumban; Pilu Chandra Das
  7. Payroll Taxes, Social Security and Informality. The 2012 Tax Reform in Colombia By Pablo Adrian Garlati Bertoldi
  8. R4D Policy Brief 2016/1a: Informal sector in Vietnam By Francois, Joseph; Oberdabernig, Doris
  9. Sample statistics as convincing evidence: A tax fraud case By Lillestøl, Jostein

  1. By: L. S. Di Mauro; A. Pluchino; A. E. Biondo
    Abstract: This paper presents a simple agent-based model of an economic system, populated by agents playing different games according to their different view about social cohesion and tax payment. After a first set of simulations, correctly replicating results of existing literature, a wider analysis is presented in order to study the effects of a dynamic-adaptation rule, in which citizens may possibly decide to modify their individual tax compliance according to individual criteria, such as, the strength of their ethical commitment, the satisfaction gained by consumption of the public good and the perceived opinion of neighbors. Results show the presence of thresholds levels in the composition of society - between taxpayers and evaders - which explain the extent of damages deriving from tax evasion.
    Date: 2018–09
  2. By: George Hondroyiannis (Bank of Greece and Harokopio University); Dimitrios Papaoikonomou (Bank of Greece)
    Abstract: The use of traceable payment methods presents an additional reform option for improving tax compliance. As regards consumption, card payments are the main alternative to cash in the euro area. Although the use of micro-data has provided clear evidence in favour of increasing information trails, time series evidence on the role of card payments in increasing compliance have been scarce and confined to the recent experience of Greece. The effect of card payments on VAT revenue is investigated using quarterly panel data for the 19 euro area economies covering the period 2003q1-2016q4. Time-varying coefficient methods are employed in order to estimate the country-specific contribution of compliance to revenue growth as a function of card payments. In line with the micro-data literature, the analysis indicates that increasing the share of card payments in private consumption expenditure improves VAT tax compliance. The gains are found to increase: (i) the lower the initial level of card use; (ii) the higher the share of self-employment and (iii) the lower the level of revenue efficiency. The highest benefits are estimated for Greece and Italy.
    Keywords: VAT; card payments; tax compliance; time-varying coefficients; Euro area
    JEL: H21 H25 H26
    Date: 2018–09
  3. By: Pilar Rey del Castillo; Jaime Villanueva-Garcia
    Abstract: The paper presents a study of the relationship between the tax morale and the individual payments of personal income tax using the statistical matching of opinion polls with a representative sample of the personal income tax returns in Spain. As an initial step, the method selected to execute the match -imputations using Bayesian Networks- is described. The relationship between a proxy variable of the individual tax morale and other variables in the declared income tax file is later analyzed using the matched files. A first result is that tax morale increases with the level of declared wages, salaries and capital gains, while it has no link with declared business income.
    Keywords: statistical matching, opinion polls, personal income tax, tax morale
    JEL: C10 C65 H24 H26
    Date: 2018
  4. By: Pavlik, Jamie Bologna; Williams, Ryan Blake
    Abstract: The positive relationship between institution quality and “official” income is well-documented. It is unclear, however, if this relationship holds once the “unofficial” economy is accounted for. An improvement in institutional quality tends to shift production out of the shadow and into the official sector. This can result in an increase in official income, at the expense of the shadow economy. This paper uses data from 4,954 Brazilian municipalities to explore the effects of institutional quality on formal, informal, and total income per-worker. The results indicate that an improvement in institutional quality leads to a positive change in total income per-worker. Importantly, the effect of improved institutional quality on income per-worker in the informal sector is neutral to positive, contradicting the findings of previous models. It seems that while positive institutional change does reallocate production from the shadows to the official sector, the reallocation increases overall productivity in the economy.
    Keywords: Political Economy, Public Economics
    Date: 2018–01–17
  5. By: Sean Higgins (UC Berkeley); Nora Lustig (Tulane University); Andrea Vigorito (Instituto de Economía, FCEA, Universidad de la República (Uruguay))
    Abstract: Do survey respondents misreport their income? If so, how does misreporting correlate with income, how does this affect estimates of income inequality, and how well do existing methods correct for bias? We use a novel database in which a subsample of Uruguay's official household survey has been linked to tax records to document the extent and distribution of labor income underreporting and to assess the performance of various existing methods to correct inequality estimates. Individuals in the upper half of the income distribution tend to report less labor income in household surveys than those same individuals earn according to tax returns, and underreporting is increasing in income. Using simulations, we find that this leads to downward-biased inequality estimates. Correction methods that rely only on survey data barely affect the biased inequality estimates, while methods that combine survey and tax data can lead to over-correction and overestimation of inequality.
    Keywords: inequality; income underreporting; tax records; household surveys
    JEL: D31 C81
    Date: 2018–09
  6. By: K. L. Krishna (Centre for Development Economics, Delhi School of Economics, Delhi, India); Bishwanath Goldar (Former Professor, Institute of Economic Growth, Delhi, India); Suresh Chand Aggarwal (Former Professor, Department of Business Economics, University of Delhi, South Campus, Delhi, India); Deb Kusum Das (Ramjas College, University of Delhi, Delhi, India); Abdul A. Erumban (The Conference Board and University of Groningen); Pilu Chandra Das (Kidderpore College, University of Calcutta, Kolkata, India)
    Abstract: A comparative analysis of total factor productivity (TFP) growth in the formal and informal segments of Indian manufacturing industries is undertaken, along with an analysis of differences in the level of TFP between the two segments of these industries. The period covered for the analysis of TFP growth is 1980-81 (1980) to 2011-12 (2011), which is broken into three-sub-periods, 1980-1993, 1994-2002 and 2003-2011. The period covered for the analysis of TFP level differences is 2003-04 to 2011-12. From the analysis of TFP growth trends, it is found that the average growth rate in TFP in the informal manufacturing sector during 1980-2011 was significantly lower than that in the formal manufacturing sector (0.6% per annum as against 4.4% per annum, based on value added function framework). Both formal and informal manufacturing experienced a fall in the rate of TFP growth during 1994-2002 as compared to 1980-1993, and then achieved a marked acceleration in TFP growth during 2003-11. The acceleration in TFP growth in aggregate formal manufacturing in India in the period since 2003 is contributed mainly by improved TFP growth performance of Coke and refined petroleum products industry with additional contributions made by Food, beverages and tobacco products, Chemicals and chemical products, and Textiles and leather products. In the case of informal manufacturing, the acceleration in TFP growth after 2003 is mainly traceable to the improved TFP growth performance of Textiles and leather products industry with additional contributions made by Wood and wood products, Food, beverages and tobacco products, and Chemicals and chemical products. The comparison of the level of TFP between the formal and informal segments of Indian manufacturing industries for the period 2003-2011 brings out that it is substantially lower in informal manufacturing than formal manufacturing.
    Keywords: Total Factor Productivity, Indian Manufacturing, Formal and Informal Segments
    JEL: D24 L60
    Date: 2018–09
  7. By: Pablo Adrian Garlati Bertoldi
    Abstract: I evaluate how the drastic reduction in payroll taxes in 2012 reduced informality in Colombia. By the end of 2012 the Colombian government implemented a tax reform that, among other things, substantially reduced payroll taxes. I evaluate the effect of this reform on informality both theoretically and empirically. Theoretically, I develop a labor market model incorporating the changes introduced by the reform. As the reduction in payroll taxes was accompanied by a change in social trans-fers' funding, which led to uncertain changes in profits and social benefits, straightforward predictions on informality are not possible. Empirically, I obtain difference-in-difference (DID) estimates from two household surveys- one composed by many repeated cross sections across many years and the other a much shorter panel dataset. Estimates from the repeated cross sections data indicate small, short-term effects and large long-term effects. Industry was the first sector to enjoy a reduction in informality, followed by services and agriculture. For workers earning around one minimum wage, I find large point estimates. Estimates from the household survey panel data are in line with these results.
    Keywords: informality, payroll taxes, social security, Colombia
    JEL: D21 H24 H30 J32 J38
    Date: 2018–09–21
  8. By: Francois, Joseph; Oberdabernig, Doris
    Abstract: For the full text of the Policy Brief, please click the link below.
    Date: 2018–09–13
  9. By: Lillestøl, Jostein (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: This report deals with the analysis of data used by tax officers to support their claim of tax fraud at a pizzeria. The possibilities of embezzlement under study are overreporting of take-away sales and underreporting of cash payments. Several modelling approaches are explored, ranging from simple well-known methods to presumably more precise tools. More specifically, we contrast common methods based on normal assumptions and models based on Gamma-assumptions. For the latter, both maximum likelihood and Bayesian approaches are covered. Several criteria for the choice of method in practice are discussed, among them, how easy the method is to understand, justify and communicate to the parties. Some dilemmas present itself: the choice of statistical method, its role in building the evidence, the choice of risk factor, the application of legal principles like “clear and convincing evidence” and “beyond reasonable doubt”. The insights gained may be useful for both tax officers and defenders of the taxpayer, as well as for expert witnesses.
    Keywords: Gamma-Beta analysis; Bayesian Gamma-analysis; Risk analysis
    JEL: C00 C10 C11 C13
    Date: 2018–09–25

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