nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2019‒12‒23
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Does the tax undermine the effect of remittances on shadow economy? By Schneider, Friedrich; Khan, Shabeer; Baharom Abdul Hamid; Khan, Abidullah
  2. Productivity and Tax Evasion By Era Dabla-Norris; Mark Gradstein; Fedor Miryugin; Florian Misch
  3. A Competitive Audit Selection Mechanism with Incomplete Information By Miloš Fišar; Ondřej Krčál; Jiří Špalek; Rostislav Staněk; James Tremewan
  4. Informality and Aggregate Productivity: The Case of Mexico By Jorge Alvarez; Cian Ruane
  5. Informality, Frictions, and Macroprudential Policy By Moez Ben Hassine; Nooman Rebei
  6. Hidden wealth By Cummins, Neil
  7. Immigration in Emerging Countries: A Macroeconomic Perspective By Agustín Arias; Juan Guerra-Salas

  1. By: Schneider, Friedrich; Khan, Shabeer; Baharom Abdul Hamid; Khan, Abidullah
    Abstract: There are considerable studies regarding the contribution of international migrants' remittances to economic growth while there is a lack of studies which investigate the effect of remittances on shadow economy. The authors explore empirically the effect of remittances and its interaction effect with tax on shadow economy by using panel data covering the period 2004-2015 and applying the GMM method for 141 countries. Their empirical model, in which a remittance-recipient government, operating in tax environment of some regimes (imposition of different levels and kinds of taxes), predicts a negative effect of remittances on shadow economy, is mitigated by a higher tax regime. In other words, the paper argues that a well-established negative correlation between remittances and shadow economy has been weakened by tax rule. The study contributes to the current literature on public policy that gives importance to know the causes of shadow economy and boost remittances effect. The authors' baseline results are robust to various computations of macroeconomics variables, institutions variables and freedom variables.
    Keywords: remittances,shadow economy,tax regime,panel technique
    JEL: O17 H24 H71 F24
    Date: 2019
  2. By: Era Dabla-Norris; Mark Gradstein; Fedor Miryugin; Florian Misch
    Abstract: The extent of tax compliance has important implications for revenue yield, efficiency and the fairness of any tax system. Tax evasion undermines revenue collection, distorts competition, and undermines a country’s development prospects. In this paper, we investigate whether higher productivity causally leads to lower tax evasion. We first present stylized facts consistent with this view and develop a model that illustrates one potential transmission channel. Second, we test the model predictions at the firm level using the self-reported share of declared income as proxy for tax evasion for a large sample of emerging and developing economies. Our results suggests that productivity improvements by firms can lead to lower tax evasion.
    Date: 2019–11–27
  3. By: Miloš Fišar (Masaryk University); Ondřej Krčál (Masaryk University); Jiří Špalek (Masaryk University); Rostislav Staněk (Masaryk University); James Tremewan (University of Auckland)
    Abstract: The experimental tax and regulatory compliance literature has shown the effectiveness of competitive audit selection mechanisms (ASMs) based on declarations and a signal of the taxpayers' actual income. However, collecting information about actual income prior to audit selection is costly. In this article, we test the effectiveness of an endogenous ASM based solely on declared income. We show theoretically and in a laboratory experiment that this new endogenous ASM significantly increases compliance in comparison with an ASM where all taxpayers face audit with equal probability. However, a further consequence of conditioning solely on declared income is that poorer taxpayers are audited more frequently, reducing the effectiveness of this ASM in generating revenue and reducing inequality. We further compare the new mechanism with an ASM that also uses a noisy signal of actual income and show that it is a significant improvement over the other two ASMs in terms of compliance, revenue, and inequality. Our results suggest that ASMs that condition only on reported income can increase compliance but should be implemented with caution, and investing in acquiring information before audit selection can have substantial benefits.
    Keywords: Tax compliance, Endogenous audit, Heterogeneous income
    Date: 2019–12–17
  4. By: Jorge Alvarez; Cian Ruane
    Abstract: We assess the aggregate productivity impact of distortions arising from labor regulations in Mexico and how they interact with informality. Using employment surveys and a firm-level economic census, we document a number of novel features about informal firms in Mexico. We then construct and estimate a model of heterogeneous firms and endogenous informality to study the micro and macro impacts from various policy reforms. Some reforms may have large impacts on informal employment but small impacts on aggregate productivity.
    Date: 2019–11–27
  5. By: Moez Ben Hassine; Nooman Rebei
    Abstract: We analyze the effects of macroprudential policies through the lens of an estimated dynamic stochastic general equilibrium (DSGE) model tailored to developing markets. In particular, we explicitly introduce informality in the labor and goods markets within a small open economy embedding financial frictions, nominal and real rigidities, labor search and matching, and an explicit banking sector. We use the estimated version of the model to run welfare analysis under optimized monetary and macroprudential rules. Results show that although informality reduces the efficiency of macroprudential policies following a convex fashion, combining the latter with an inflation targeting objective could be beneficial.
    Date: 2019–11–27
  6. By: Cummins, Neil
    Abstract: Sharp declines in wealth-concentration occurred across Europe and the US during the 20th century. But this stylized fact is based on declared wealth. It is possible that today the richest are not less rich but rather that they are hiding much of their wealth. This paper proposes a method to measure this hidden wealth, in any form. In England, 1920-1992, elites are concealing 20-32% of their wealth. Among dynasties, hidden wealth, independent of declared wealth, predicts appearance in the Offshore Leaks Database of 2013-6, house values in 1999, and Oxbridge attendance, 1990-2016. Accounting for hidden wealth eliminates one-third of the observed decline of top 10% wealth-share over the past century
    Keywords: hidden wealth; inequality; economic history; big data; tax evasion
    JEL: N00 N33 N34 D31 H26
    Date: 2019–12
  7. By: Agustín Arias; Juan Guerra-Salas
    Abstract: Roughly one third of migrants worldwide reside in developing countries, yet most papers on the macroeconomiceffects of immigration focus on advanced economies. We investigate the medium- and long-term effects of immigration in an emerging country, considering a salient feature of this type of economies: the importance of labor informality. We build an overlapping generations model featuring 24 cohorts, an informal sector, and households with heterogeneous skill levels, among other features, that help us match key demographic and economic characteristics of Chile, an emerging country that has recently experienced an important immigration wave. An immigration wave increases the supply of labor, creating downward pressure on wages in the formal sector. Workers respond by reallocating labor effort to the informal sector, which allows them to mitigate the decline in consumption per worker triggered by lower formal-sector wages. Our model, thus, constitutes a framework for the quantitative analysis of immigration in emerging countries.
    Date: 2019–11

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