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on Informal and Underground Economics |
| By: | Wu, Dong Frank (International Monetary Fund); Schneider, Friedrich (University of Linz) |
| Abstract: | This paper is the first attempt to directly explore the long-run nonlinearity of the shadow economy. 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 with economic growth. 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, level of development, nonlinearity, GDP per capita |
| JEL: | E26 H26 O17 O43 I25 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12385&r=all |
| By: | Kotsogiannis, Christos; Mateos-Planas, Xavier |
| Abstract: | This paper studies income-tax evasion in a quantitative incomplete-markets setting with heterogeneous agents. A central aspect is that, realistically, evaded taxes are a form of contingent debt. Since evasion becomes part of a portfolio decision, risk and credit considerations play a central part in shaping it. The model calibrated to match estimated average levels of evasion does a good job in producing observed cross-sectional average evasion rates that decline with age and with earnings. The model also delivers implications for how evasion varies in the cross sectional distribution of wealth and tax arrears. Evasion has substantial effects on macroeconomic variables and welfare, and agent heterogeneity and general equilibrium are very important elements in the explanation. The analysis also considers the response of evasion to a flat-tax policy reform. In spite of the direct incentives to evade less under a flat tax rate, the reform causes households to save more, rendering the change in overall evasion modest. |
| Keywords: | Tax evasion; contingent debt; incomplete markets with heterogeneous agents; portfolio choice; risk sharing; tax progressivity |
| JEL: | E20 E62 H30 |
| Date: | 2019–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:100941&r=all |
| By: | Lisa Grazzini; Alessandro Petretto |
| Abstract: | In a federal country with two regions, consumers can decide not only the region where to invest, but also the type of capital investment. We analyse how such decision is affected by two sources of asymmetry: a first type of capital is taxed at a regional level while a second one is taxed at a federal level, and for the latter a different degree of tax evasion may arise across regions. We show how tax evasion arising at a federal level affects not only the federal tax policy but also the regional tax policies both directly and indirectly because of vertical tax competition. In particular, we show under which conditions a decrease in the level of tax compliance on the second type of capital can lead to a reduction in its federal tax rate, and simultaneously to an increase in the regional tax rate on the other type of capital investment. |
| Keywords: | Fiscal federalism; Tax Competition, Tax evasion. |
| JEL: | H2 H41 H71 H77 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2019_19.rdf&r=all |
| By: | Jan-Emmanuel De Neve; Clement Imbert; Maarten Luts; Johannes Spinnewijn; Teodora Tsankova |
| Abstract: | We study the impact of deterrence, tax morale, and simplifying information on tax compliance. We ran _ve experiments spanning the tax process which varied the communication of the tax administration with all income taxpayers in Belgium. A consistent picture emerges across experiments: (i) simplifying communication increases compliance, (ii) deterrence messages have an additional positive effect, (iii) invoking tax morale is not effective. Even tax morale messages that improve knowledge and appreciation of public services do not raise compliance. In fact, heterogeneity analysis with causal forests shows that tax morale treatments backfire for most taxpayers. In contrast, simplification has large positive effects on compliance, which diminish over time due to follow-up enforcement. A discontinuity in enforcement intensity, combined with the experimental variation, allows us to compare simplification with standard enforcement measures. Simplification is far more cost-effective, allowing for substantial savings on enforcement costs, and also improves compliance in the next tax cycle. |
| Keywords: | tax compliance, field experiments, simplification, enforcement |
| JEL: | C93 D91 H20 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1621&r=all |
| By: | Advani, Arun (University of Warwick); Elming, William (IFS and TARC); Shaw, Jonathan (Financial Conduct Authority) |
| Abstract: | Understanding causes of and solutions to non-compliance is important for a tax authority. In this paper we study how and why audits affect reported tax in the years after audit – the dynamic effect – for individual income taxpayers. We exploit data from a random audit program covering more than 53,000 income tax self assessment returns in the UK, combined with data on the population of tax filers between 1999 and 2012. We first document that there is substantial non-compliance in this population. One in three filers underreports the tax owed. Third party information on an income source does not predict whether a taxpayer is non-compliant on that income source, though it does predict the extent of underreporting. Using the random nature of the audits, we provide evidence of dynamic effects. Audits raise reported tax liabilities for at least five years after audit, implying an additional yield 1.5 times the direct revenue raised from the audit. The magnitude of the impact falls over time, and this decline is faster for less autocorrelated income sources. Taking an event study approach, we further show that the change in reporting behaviour comes only from those found to have made errors in their tax report. Finally, using an extension of the Allingham-Sandmo (1972) model, we show that these results are best explained by audits providing the tax authority with information, which then constrains taxpayers’ ability to misreport. |
| Keywords: | tax audits, tax revenue, tax reporting decisions, income tax, self assessment, HMRC JEL Classification: D04, H26, H83 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:cge:wacage:414&r=all |
| By: | Marcelo Bérgolo (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Gabriel Burdín (The University of Leeds); Mauricio De Rosa (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Matías Giaccobasso (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Martín Leites (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía) |
| Abstract: | A first-order policy issue in low and middle income countries is how to design optimal tax systems in order to improve the state’s potential of supporting economic development. Although information regarding behavioral responses to taxation is a key input for tax design, the evidence in developing contexts is still scarce. In this paper we contribute to fill this gap by exploring in detail how individual taxpayers respond to personal income taxation in Uruguay. To do this, we rely on rich administrative tax records covering the universe of Uruguayan taxpayers and implement a bunching design. First, we find a moderate implied elasticity of taxable income (0.16) in the first kink point of the tax schedule. Second, we investigate the mechanisms driving these responses extensively. We find that the observed responses are a combination of both gross labor income and deductions responses. In particular, we document a more intensive use of personal deductions for taxpayers close to the kink point, and suggestive evidence of evasion responses through unilateral and employer-employee collusion labor income misreporting. Our results suggest that policy efforts should be directed at broadening the tax base and improving the enforcement capacities of tax authorities rather than eroding tax progressivity. |
| Keywords: | Personal income taxation, tax bunching, elasticity of labor income, deductions behavior, misreporting, developing economies |
| JEL: | H21 H24 H30 J22 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:ulr:wpaper:dt-05-19&r=all |
| By: | Azuara Herrera, Oliver; Azuero, Rodrigo; Bosch, Mariano; Torres, Jesica |
| Abstract: | Simplified tax regimes reduce both tax rates and compliance costs for small firms. On the one hand, these regimes increase the number of businesses formally registered and have the potential of also expanding the safety net when they subsidize the contributions to social security of workers in micro firms. On the other hand, they likely incentivize tax evasion due to the discontinuities in the tax schedule they introduce, and distort several micro-level margins, distortions which potentially accumulate into lower levels of aggregate productivity and GDP. In this paper, we exploit data from household surveys and administrative records for Peru, Brazil, and Mexico to examine the likely effects of special regimes on tax revenues, social protection, and resource misallocation. We find bunching of firms around the eligibility threshold of various tax regimes in Peru. This can be due to misreporting to tax authorities or to firms limiting their size to enjoy the benefits of the special tax regimes. In Brazil, we document how the introduction of a special tax regime benefiting the self-employed might have generated incentives for workers to register as entrepreneurs. Finally, in Mexico we find suggesting evidence showing how the introduction of a new special tax regime for small businesses in 2014 might have led to an increase in the number of employers contributing to the social security of their employees and in the number of self-employed making voluntary contributions to social protection. In all these instances we do not quantify exact causal effects, but we present instead descriptive evidence undoubtedly helpful to direct future research. |
| JEL: | L11 L51 J8 H26 H30 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:9511&r=all |
| By: | Inés Berniell (Centro de Estudios Distributivos Laborales y Sociales (CEDLAS) - Instituto de Investigaciones Económicas, Facultad de Ciencias Económicas, Universidad Nacional de La Plata); Lucila Berniell (CAF-Development Bank of Latin America, Research Department); Dolores de la Mata (CAF-Development Bank of Latin America, Research Department); María Edo (Universidad de San Andr´es and CONICET); Mariana Marchionni (Centro de Estudios Distributivos Laborales y Sociales (CEDLAS) - Instituto de Investigaciones Económicas, Facultad de Ciencias Económicas, Universidad Nacional de La Plata and CONICET) |
| Abstract: | Recent work has quantified the large negative effects of motherhood on female labor market outcomes in Europe and the US. But these results may not apply to developing countries, where labor markets work differently and informality is widespread. In less developed countries, informal jobs, which typically include microenterprises and self-employment, offer more time flexibility but poorer social protection and lower labor earnings. These characteristics affect the availability of key inputs in the technology to raise children, and therefore may affect the interplay between parenthood and labor market outcomes. Through an event-study approach we estimate short and long-run labor market impacts of children in Chile, an OECD developing country with a relatively large informal sector. We find that the birth of the first child has strong and long lasting effects on labor market outcomes of Chilean mothers, while fathers remain unaffected. Becoming a mother implies a sharp decline in mothers’ labor supply, both in the extensive and intensive margins, and in hourly wages. We also show that motherhood affects the occupational structure of employed mothers, as the share of jobs in the informal sector increases remarkably. In order to quantify what the motherhood effect would have been in the absence of an informal labor market, we build a quantitative model economy, that includes an informal sector which offers more flexible working hours at the expense of lower wages and weaker social protection, and a technology to produce child quality that combines time, material resources and the quality of social protection services. We perform a counterfactual experiment that indicates that the existence of the informal sector in Chile helps to reduce the drop in LFP after motherhood in about 35%. We conclude that mothers find in the informal sector the flexibility to cope with both family and labor responsibilities, although at the cost of resigning contributory social protection and reducing their labor market prospects. |
| JEL: | J13 J16 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:dls:wpaper:0247&r=all |
| By: | Poschke, Markus (McGill University) |
| Abstract: | Poor countries have low rates of wage employment and high rates of self-employment. This paper shows that they also have high rates of unemployment relative to wage employment, and that self-employment is particularly high where the unemployment-wage employment ratio is high. I interpret high unemployment-employment ratios as evidence of labor market frictions, and develop a simple heterogeneous-firm search and matching model with choice between job search and self-employment to analyze their effect. Quantitative analysis of the model, separately calibrated to eight countries, shows that variation in labor market frictions can explain almost the entire variation in not only unemployment, but also wage employment and self-employment across the calibration countries. The model generates joint variation in unemployment and self-employment accounting for at least a third of their relationship in the data. Labor market frictions reduce output not only by affecting employment, but also by pushing searchers into low-productivity own-account work. |
| Keywords: | entrepreneurship, occupational choice, labor market frictions, self-employment, unemployment, wage employment, firm size, productivity |
| JEL: | O40 L26 J64 J23 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12367&r=all |