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on Informal and Underground Economics |
| By: | Bachas,Pierre Jean; Gadenne,Lucie; Jensen,Anders |
| Abstract: | Can consumption taxes reduce inequality in developing countries? This paper combines household expenditure data from 31 countries with theory to shed new light on the redistributive potential and optimal design of consumption taxes. It uses the place of purchase of each expenditure to proxy for informal (untaxed) consumption which enables characterizing the informality Engel curve. The analysis finds that the budget share spent in the informal sector steeply declines with income, in all countries. The informal sector thus makes consumption taxes progressive: households in the richest quintile face an effective tax rate that is twice that of the poorest quintile. The paper extends the standard optimal commodity tax model to allow for informal consumption and calibrates it to the data to study the effects of different tax policies on inequality. Contrary to consensus, the findings show that consumption taxes are redistributive, lowering inequality by as much as personal income taxes. These effects are primarily driven by the shape of the informality Engel curve. Taking informality into account, commonly used redistributive policies, such as reduced tax rates on necessities, have a limited impact on inequality. In particular, subsidizing food cannot be justified on equity or efficiency grounds in several poor countries. |
| Keywords: | Labor Markets,Tax Administration,Tax Law,Economic Adjustment and Lending,Macro-Fiscal Policy,Taxation&Subsidies,Public Finance Decentralization and Poverty Reduction,Public Sector Economics,Tax Policy,Rural Labor Markets,Gender and Development |
| Date: | 2020–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:9267&r=all |
| By: | Palacios, Robert (World Bank); Robalino, David A. (World Bank) |
| Abstract: | Given the prevalence of informal labor, most countries have combined contributory social insurance programs (pensions, unemployment benefits, and health insurance), with non-contributory insurance programs and several types of "safety nets." All of these programs involve different types of subsidies and taxes, sometimes implicit. Because of design problems and the lack of coordination/integration between programs, these subsidies/taxes tend to cause four problems: 1) they can reduce incentives to contribute to mandatory insurance programs and to create formal jobs; 2) they can be regressive since redistribution often benefits middle/high income workers more than low income workers 3) they do not provide continuous protection as workers change occupations and constrain rather than facilitate, labor mobility; and 4) coverage tends to exclude many informal sector workers in the middle of the income distribution. As such, existing programs are not well prepared to deal with a world of labor characterized by persistent low productivity jobs, more frequent labor market transitions including across sectors and geographic regions and higher equilibrium unemployment rates for some groups of workers. This paper develops a policy framework to integrate, in a transparent way, the insurance function (actuarially-fair risk pooling or savings) and the redistributive function (transfers) of the social protection system in order to expand coverage, improve equity, and reduce labor market distortions. We illustrate this type of integration with the case of old-age pensions which is typically the most important intervention, at least from a fiscal perspective. |
| Keywords: | social insurance, social assistance, universal basic income, jobs, pensions, future of work, COVID-19 |
| JEL: | H24 J26 J46 J65 J32 I13 H53 H55 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13258&r=all |
| By: | Thibault Lemaire |
| Abstract: | The transmission mechanisms of fiscal policy are significantly affected by informality in the labour market. Extending a narrative database of fiscal consolidations in 14 countries from Latin America and the Caribbean between 1989 and 2016 in order to account for heterogeneity in terms of commitment to the reforms, this paper shows that tax-based and spending-based multipliers are both recessionary and do not significantly differ one from another in this region. Furthermore, these multipliers decline in absolute value as the level of labour informality increases in the economy, although evidences are less robust for spending-based consolidations. An analysis of the effects of tax-based consolidations on private demand suggests that labour market informality constitutes a short-term social buffer that attenuates the contractionary effects of this type of policy by increasing investment opportunities through tax evasion and entrepreneurial alternatives to unemployment for dismissed workers. |
| Keywords: | Fiscal consolidation, taxation, informality, emerging market economies. |
| JEL: | E62 E26 E32 H5 H6 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:764&r=all |
| By: | Iswahyudi, Heru |
| Abstract: | This article examines the experience of Indonesia in adopting gross receipts taxes as one of the elements in the architecture of its tax system. Although Indonesian income tax law and value-added tax law do not explicitly impose gross receipts taxes, however, these laws authorize the use of presumptive taxation methods, which in practice are essentially gross receipts taxes. In the past three decades there have been expansions in the use of these presumptive methods in the tax system. As gross receipts tax is considered to be one of the most distortive tax systems, its expansions may also mean that its distortive effects may have expanded throughout the economy. Nevertheless, if well-designed and properly managed, gross receipts taxes might serve as an effective instrument to broadening the tax base particularly in countries with a significant presence of the informal sector, while still minimizing its adverse impacts on the economy. |
| Keywords: | Gross Receipts Taxes, Economic Distortion, Hard-to-Tax, Administrative Capacity, Informal Sector |
| JEL: | E62 H21 H30 O17 |
| Date: | 2020–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:100617&r=all |
| By: | Laura Alfaro, Oscar Becerra y Marcela Eslava; Oscar Becerra; Marcela Eslava |
| Abstract: | Abstract Emerging economies are characterized by an extremely high prevalence of informality, small- firm employment and jobs not fit for working from home. These features factor into how the COVID-19 crisis has affected the economy. We develop a framework that, based on account-ing identities and actual data, quantifies potential job and income losses during the crisis and recovery for economies with different economic organization structures. Our analysis incorporates differential exposure of jobs across categories of firm-size and formality status, as well as sectors and occupations. We account for the direct supply shock caused by lockdowns, the idiosyncratic demand shock suffered by sectors that rely on high contact with their costumers, the transmission of both shocks through IO linkages, and the overall aggregate demand effect derived from these shocks. Applying our framework to data for Colombia, which exhibits an employment distribution similar to that of other emerging market countries, in particular Latin America, we find that well over 50% of jobs are at risk in the initial stages of the crisis. Because informal jobs and those not fit for telework are at higher risk, this number goes down to 33% if the US employment distribution is imposed on the Colombian data. As the crisis deepens, the risk of unemployment grows. However, informality rebounds quickly in the recovery, an employment at risk is quickly reduced to 20% of the baseline, all concentrated in formal jobs. Our findings point to the importance of action to maintain formal matches from dissolving, given their scarcity and rebuilding difficulty, while protecting the poor and the informal via income transfers. |
| Keywords: | Keywords: COVID-19, emerging economies, informality, Örm-size distribution, Latin America. |
| JEL: | F O47 O20 O17 |
| Date: | 2020–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:018193&r=all |
| By: | Narula, Rajneesh (John H. Dunning Centre for International Business, Henley Business School, University of Reading) |
| Abstract: | In the developing world, the informal economy can account for as much as 80% of the population. I focus on the urban component of informality, where both informal employment and informal enterprises are especially vulnerable to the pandemic-induced economic shock. I explain the complex nature of informality, some of the reasons for its persistence, and its interdependency with the formal economy, especially in the manufacturing sector, through global value chains. Large firms (whether MNEs or domestic firms) sub-contract considerable activity to informal enterprises, but this is precarious in character. I suggest the crisis provides the circumstances for greater active engagement with informal actors, by placing informal enterprises on par with formal firms within industrial policy. I propose integration and registration, as opposed to formalization, and the provision of state support without taxation. The role of the state is also crucial in matchmaking, creating incentives for GVCs to engage with informal actors systematically, and to reduce the transaction costs for informal actors in such engagement. These actions are likely to provide benefits in the longer run, even if they prove costly in the short run. |
| Keywords: | informal enterprises, dual economies, urban poor, linkages, employment, policy |
| JEL: | E26 O17 O19 O25 |
| Date: | 2020–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:unm:unumer:2020024&r=all |
| By: | Balde, Racky (UNU-MERIT, Maastricht University); Boly, Mohamed (Universite Clermont Auvergne, CNRS, IRD, CERDI); Avenyo, Elvis (UNU-MERIT, Maastricht University, and Department of International Development, University of Oxford) |
| Abstract: | The COVID-19 pandemic is a global crisis that has put a local spotlight on sub-Saharan Africa’s socio-economic challenges. This paper presents real time survey evidence on the labour market effects of COVID-19 in Senegal, Mali, and Burkina Faso. We investigate how informality exacerbates the immediate effects of the COVID-19 pandemic on job loss, decrease in earnings, and difficulties for individuals to support their basic needs. We document a reduction in economic activities and find that workers in the informal economy tend to be more hard-hit by the COVID-19 pandemic. Informal workers are more likely to lose their jobs and tend to experience decrease in earnings. These findings also hold for those who work in high-risk sectors. Informal workers equally appear to be more likely to struggle to meet their basic needs in the midst of the pandemic. We discuss the policy implications of these findings. |
| Keywords: | COVID-19, Crisis, Labour Market, Informality, Africa |
| JEL: | J46 J63 O17 O55 |
| Date: | 2020–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:unm:unumer:2020022&r=all |