nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2019‒04‒08
eight papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Nonlinearity Between the Shadow Economy and Level of Development By Dong Frank Wu; Friedrich Schneider
  2. Tax Morale and Fairness in Conflict - An Experiment By Christoph Engel; Luigi Mittone; Azzurra Morreale
  3. An Analysis of Discrepancies in Taxpayers' VAT Declarations in Rwanda By Mascagni, Giulia; Mukama, Denis; Santoro, Fabrizio
  4. Transaction-tax Evasion in the Housing Market By José García-Montalvo; Amedeo Piolatto; Josep Raya
  5. Designing Interest and Tax Penalty Regimes By Christophe J Waerzeggers; Cory Hillier
  6. Expensive to be a Female Trader: The Reality of Taxation of Flea Market Traders in Zimbabwe By Ligomeka, Waziona
  7. Health insurance and self-employment transitions in Vietnam By Le, Nga; Groot, Wim; Tomini, Sonila M.; Tomini, Florian
  8. More Work to Do? Taking Stock of Latin American Labor Markets By Antonio David; Frederic Lambert; Frederik G Toscani

  1. By: Dong Frank Wu; Friedrich Schneider
    Abstract: This paper is the first attempt to directly explore the long-run nonlinear relationship between the shadow economy and level of development. Using a dataset of 158 countries over the period from 1996 to 2015, our results reveal a robust U-shaped relationship between the shadow economy size and GDP per capita. Our results imply that the shadow economy tends to increase when economic development surpasses a given threshold or at least does not disappear. Our findings suggest that special attention should be given to the country’s level of development when designing policies to tackle issues related to the shadow economy.
    Keywords: Shadow economy;National income;Social safety nets;Labor market flexibility;Economic growth;institutional factor;non-institutional;regression;long-run;country group
    Date: 2019–03–01
  2. By: Christoph Engel (Max Planck Institute for Research on Collective Goods); Luigi Mittone (University of Trento); Azzurra Morreale (LUT University, Finland)
    Abstract: Arguably, for many citizens the perceived expected disutility from sanctions is smaller than the monetary gain from tax evasion. Nevertheless most people pay their taxes most of the time. In a lab experiment, we show that the willingness to pay taxes even absent enforcement is indeed pronounced. Yet voluntary compliance is reduced if participants learn that income is heterogeneous. The effect is driven by participants with the lowest income. The reduction obtains irrespective of the tax regime. If the tax is proportional to income, or progressive, participants become more skeptical about the willingness of participants with high income to comply.
    Keywords: tax evasion, tax morale, heterogeneity, income inequality, lump sum tax, proportional tax, progressive tax, beliefs, path model
    JEL: C30 C91 D01 D02 D31 D63 D91 H26 K34 K42
    Date: 2019–02
  3. By: Mascagni, Giulia; Mukama, Denis; Santoro, Fabrizio
    Abstract: In recent years, one of the most important developments in African tax administration has been the widespread adoption of value added tax (VAT). A key feature of VAT is its self-enforcement mechanism, which incentivises buyers to request a receipt and claim refunds on VAT paid. This should in principle go against the seller’s incentive to under-report sales and pay less VAT. VAT also generates a paper trail: sellers and buyers need to keep records and report data to the revenue authority, which gains information to use for enforcement. However, VAT can be challenging to implement in low and middle-income countries for at least two reasons: (i) administrative complexity, as the authority needs to check more information to prevent evasion and fraud than for a simple sales tax; (ii) evasion and informality, as the VAT chain can break down when formal taxpayers trade with informal ones, or when under-reporting is widespread. Working with the Rwanda Revenue Authority (RRA), we focus on the challenge of administrative complexity. This could be solved by better use of available administrative data to spot incorrect reporting. We map the extent and depth of VAT discrepancies in Rwanda from July 2016-June 2017. Two types of discrepancies are studied: (i) internal discrepancies, i.e. divergent information reported by the same taxpayer in different data sources; and (ii) external discrepancies, i.e. divergent information reported by sellers and buyers for the same transactions. We also measure the effectiveness of the RRA’s new (January 2017) refund validation control, which tackles buyers’ fake refund claims.
    Keywords: Finance, Governance,
    Date: 2019
  4. By: José García-Montalvo; Amedeo Piolatto; Josep Raya
    Abstract: We model the behaviour of a buyer trying to evade the real estate transfer tax. We identify over-appraisal as a key, easily-observable element that is inversely related with tax evasion. We conclude that the tax authority could focus auditing efforts on low-appraisal transactions. We include `behavioural' components (shame and stigma) allowing to introduce buyers' (education) and societal (social capital) characteristics that explain individual and idiosyncratic variations. Our empirical analysis confirms the predictions using a unique database, where we directly observe: real payment, value declared to the authority, appraisal, buyers' educational level and local levels of corruption and trust.
    Keywords: transfer tax, Tax evasion, second-hand housing market, overappraisal, Loan-To-Value, corruption, social capital, stigma, shame, education
    JEL: G21 H26 R21
    Date: 2019–03
  5. By: Christophe J Waerzeggers; Cory Hillier
    Abstract: Designing Interest and Tax Penalty Regimes
    Keywords: Tax revenue;Market interest rates;Tax assessments;Interest rates on loans;Tax evasion;administrative penalty;underpayment;tax authority;late payment;taxpayer
    Date: 2019–03–18
  6. By: Ligomeka, Waziona
    Abstract: Interest is growing in taxing small-scale traders in developing countries in both the academic literature and the policy arena. This interest is due to the large and often growing portion of small-scale businesses in many developing economies, which is eroding their formal tax bases. Zimbabwe is slowly, but increasingly taxing this sector. In 2005 the country introduced a simplified tax regime targeting small-scale businesses, requiring them to pay a presumptive tax instead of the standard corporate tax. Initially, only a limited number of business types were subject to the presumptive tax. However, in 2011 additional small-scale business types were included in the regime. The interest to tax the small-scale sector emanates from the gradual but significant increase in the number of small-scale traders and the reduction in formal tax revenue as a result of a decline in economic activities. As a percentage of its total economy, Zimbabwe has the second largest informal sector in the world, with 60.6% of its economy engaged in small-scale business. However, as the drive to tax more small-scale businesses is increasing in Zimbabwe, the reality of taxing this sector is unclear. Accordingly, this study aims to answer the following questions: 1. What kind of taxes do flea market traders pay in Zimbabwe? 2. What proportion of a flea market trader’s income is paid in taxes? 3. Is there gender disparity in the taxation of flea market traders?
    Keywords: Finance, Governance,
    Date: 2019
  7. By: Le, Nga (UNU-MERIT); Groot, Wim (UNU-MERIT, TIER and CAPHRI School for Public Health and Primary Care, Maastricht University); Tomini, Sonila M. (UNU-MERIT); Tomini, Florian (Centre for Primary Care and Public Health Queen Mary University, London,)
    Abstract: Health insurance can have important effects on self-employment and self- employment transitions. However, there is a literature gap on the relationship between health insurance and self-employment in low and middle income countries, especially in the context of rapid expansion of health insurance in these countries. This paper examines this relationship in Vietnam with a focus on the comparison between the voluntary scheme for the informal sector (mostly self-employed workers) and the compulsory insurance for the formal sector (mostly wage workers). We employ a Probit model with selection on a panel from the Vietnamese Household Living Standards Surveys 2010-2014 to investigate the association between health insurance and self-employment entry and exit. We show that those with compulsory health insurance in Vietnam, the formal workers, are 10 percentage points less likely to enter self-employment compared to those having voluntary insurance. Regarding self-employment exit, people with compulsory insurance are more likely to exit self-employment compared to those covered by voluntary insurance. However, the effect size is relatively small.
    Keywords: health insurance, self-employment, Vietnam, self-employment entry, self-employment exit
    JEL: I13 J22
    Date: 2019–03–22
  8. By: Antonio David; Frederic Lambert; Frederik G Toscani
    Abstract: We analyze the performance of labor markets in Latin America since the late 1990s. Strong GDP growth during the commodity boom period led to important gains in employment and a fall in the unemployment rate as labor demand outpaced an increasing labor supply. We emphasize the role of informality in the dynamics of labor markets in Latin America. A re-examination of Okun’s law shows that informality dampens changes in unemployment accompanying output fluctuations. Moreover, we present some evidence that countries with higher redundancy costs and cumbersome dismissal regulations, exhibit “excess” informality over and above what would be expected based on their income and educational levels. Labor market reforms could thus contribute to reducing informality and increasing the responsiveness of labor markets to output growth. However, looking at selected case studies of reforms using the synthetic control method, we find mixed results in terms of labor market outcomes.
    Date: 2019–03–08

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