nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2020‒08‒10
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Tolerance of Informality and Occupational Choices in a Large Informal Sector Economy By Marcelo Arbex; Marcio V. Correa; Marcos R. V. Magalhaes
  2. Central bank digital currency and informal economy By Eun Young Oh; Shuonan Zhang
  3. The Optimal Turnover Threshold and Tax Rate for SMEs By Feng Wei; Jean-François Wen
  4. More Work to Do? Taking Stock of Latin American Labor Markets By Antonio David; Frederic Lambert; Frederik G Toscani
  5. Nonlinearity Between the Shadow Economy and Level of Development By Dong Frank Wu; Friedrich Schneider
  6. Explaining the Shadow Economy in Europe: Size, Causes and Policy Options By Ben Kelmanson; Koralai Kirabaeva; Leandro Medina; Borislava Mircheva; Jason Weiss
  7. The $100 Million Nudge: Increasing Tax Compliance of Businesses and the Self-Employed using a Natural Field Experiment By Marvin Cardoza; Justin Holz; John List; Joaquin Zentner; Alejandro Zentner
  8. Trade Facilitation and Tariff Evasion By Cosimo Beverelli; Rohit Ticku

  1. By: Marcelo Arbex (Department of Economics, University of Windsor); Marcio V. Correa (CAEN - Graduate Studies in Economics, Federal University of Ceara); Marcos R. V. Magalhaes (CAEN - Graduate Studies in Economics, Federal University of Ceara)
    Abstract: We study an equilibrium occupational choice model where heterogeneous agents decide to become either workers or entrepreneurs in the formal or informal sector. Informal output is subjected to taxation determined by a combination of managers capital choice and the society's tolerance of informality. The model is consistent with empirical evidence for the Brazilian informal sector. The counterfactual analysis shows substantial heterogeneity of policy effects on occupational choices (entrepreneur-worker) and within the entrepreneurial choices (formal-informal). Changes in the society's tolerance of informality lead agents to shift between the two entrepreneurial choices rather than in the entrepreneur-worker dimension.
    Keywords: Informal Sector; Social Norms; Credit Constraints; Limited Enforcement
    JEL: E6 E26 O11 O17 H26 Z13
    Date: 2020–07
  2. By: Eun Young Oh (University of Portsmouth); Shuonan Zhang (University of Portsmouth)
    Abstract: The central bank digital currency (CBDC) attracts discussions on its merits and risks but much less attention is paid to the adoption of a CBDC. In this paper, we show that the CBDC may not be widely accepted in the presence of a sizeable informal economy. Based on a two-sector monetary model, we show an L-shaped relationship between the informal economy and CBDC. The CBDC can formalize the informal economy but this effect becomes marginally significant in countries with significantly large informal economies. In order to promote CBDC adoption and improve its effectiveness, tax reduction and the positive CBDC interest rate can be useful tools. We further show that CBDC policy rate adjustment triggers a reallocation effect between formal and informal sectors, through which improves the effectiveness of both conventional monetary policy and fiscal policy.
    Keywords: Central Bank Digital Currency, Informal Economy, Quantitative Analysis
    JEL: E26 E40 E42 E58
    Date: 2020–07–21
  3. By: Feng Wei; Jean-François Wen
    Abstract: Presumptive income taxes in the form of a tax on turnover for SMEs are pervasive as a way to reduce the costs of compliance and administration. We analyze a model where entrepreneurs allocate labor to the formal and informal sectors. Formal sector income is subjected either to a corporate income tax or a tax on turnover, depending on whether their turnover exceeds a threshold. We characterize the private sector equilibrium for any given configuration of tax policy parameters (corporate income tax rate, turnover tax rate, and threshold). Given private behavior, social welfare is optimized. We interpret the first-order conditions for welfare maximization to identify the key margins and then simulate a calibrated version of the model.
    Keywords: Tax reforms;Tax rates;Tax revenue;Alternative minimum taxes;Effective tax rate;Turnover Tax,Threshold,Corporate Income Tax,Tax Compliance,Informality,compliance cost,tax regime,tax rate
    Date: 2019–05–07
  4. 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.
    Keywords: Labor market institutions;Labor market reforms;Labor market regulations;Labor market policy;Labor market characteristics;Labor Markets,Latin America,Okun’s Law,Informality,Okun,labor market reform,labor market,employment growth
    Date: 2019–03–08
  5. 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
  6. By: Ben Kelmanson; Koralai Kirabaeva; Leandro Medina; Borislava Mircheva; Jason Weiss
    Abstract: This paper examines the drivers, and reestimates the size of shadow economies in Europe, with a focus on the emerging economies, and recommends policies to increase formality. The size of shadow economies declined across Europe in recent years but remains significant, especially in Eastern Europe. In the emerging European economies, the key determinants of shadow economy size are regulatory quality, government effectiveness, and human capital. The paper argues that a comprehensive package of reforms, focused on country-specific drivers, is needed to successfully combat the shadow economy. The menu of policies most relevant for Europe’s emerging economies include: reducing regulatory and administrative burdens, promoting transparency and improving government effectiveness, as well as improving tax compliance, automating procedures, and promoting electronic payments.
    Keywords: Shadow economy;Labor market reforms;Labor force participation;Labor market regulations;Labor market policy;informal economy,WP,government effectiveness,percent of GDP,formal sector,informality,informal worker
    Date: 2019–12–13
  7. By: Marvin Cardoza; Justin Holz; John List; Joaquin Zentner; Alejandro Zentner
    Abstract: This paper uses a natural field experiment to examine the effectiveness of specific nudges on tax compliance amongst firms and the self-employed in the Dominican Republic. In collaboration with the Dominican Republic's tax authority, we designed messages for more than 28,000 self-employed workers and over 56,000 firms. Leveraging administrative tax data, we find evidence that our nudges (increasing the salience of prison sentences or public disclosure of tax evaders) have large effects on increasing tax compliance, primarily working through the channel of decreasing claimed tax exemptions. Interestingly, we find that firms are more impacted than the self-employed, and that firm size is critically linked to nudge effectiveness: larger firms are considerably more influenced by nudges than smaller firms. We find this latter result noteworthy given the paucity of evidence showing significant behavioral impacts of nudges amongst the largest players in a market. Overall, our messages increased tax revenue by $193 million (roughly 0.23% of the Dominican Republic's GDP in 2018), with over $100 million constituting income that the government would not have received without our field experimental nudges.
    Date: 2020
  8. By: Cosimo Beverelli (Economic Research and Statistics Division, World Trade Organization; Robert Schuman Centre for Advanced Studies, European University Institute); Rohit Ticku (Institute for the Study of Religion, Economics and Society, Chapman University)
    Abstract: This paper investigates the extent to which trade facilitation measures included in the WTO Trade Facilitation Agreement affect tariff evasion. In a dataset covering 121 countries and the whole set of HS6 product categories in 2012, 2015, and 2017, the paper shows that trade facilitation measures that improve legal certainty for traders moderate tariff evasion. Holding tariff rate constant at its mean, one standard deviation improvement in trade facilitation measures related to legal certainty reduces tariff evasion, as measured by missing imports in trade statistics, by almost 12%. In a counterfactual with full trade liberalization, countries with higher scores on facilitation measures related to legal certainty experience larger reductions in tariff evasion than countries with lower scores on these measures, even for similar initial tariff rates. We investigate potential channels and show that improving legal certainty is effective in reducing tariff evasion due to under-reporting of import prices and under-reporting of import quantities, as well as in countries with weakest control of corruption.
    Keywords: Tariff; International Trade Agreements; WTO; Tariff Evasion
    JEL: F13 F14 H26
    Date: 2020
  9. By: Combey, Adama
    Abstract: The mobilization of tax revenue continues to be a major challenge in Togo and the composition of this revenue reveals that the Value Added Tax (VAT) is its essential driver. However, there is a lack of targeted research or studies on the VAT gap. This paper evaluates and analyzes the difference between the VAT total tax liability and the amount of VAT actually collected through a top-down approach by distinguishing policy gap and compliance gap and identifying the sectors and branches of activity concerned. The results indicate that the VAT gap in Togo remains relatively large, although it has significantly improved in recent years to reach 45.9% of the amount of potential revenue (8.3% of GDP) in 2015, after 63.2% (11.4% of GDP) in 2007. Moreover, there is flexibility to improve VAT revenue through a more targeted tax administration for some branches, namely the products of extraction, wood, publishing and printing products, construction work, accommodation and food services, real estate and business services, and repair services.
    Keywords: VAT gap, top-down approach, compliance gap, policy gap
    JEL: C01 C02 H21 H26
    Date: 2020–06–30

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