nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2020‒10‒26
eight papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Mental Accounting, Loss Aversion, and Tax Evasion: Theory and Evidence By Sanjit Dhami; Hajimoladarvish
  2. Optimal income taxation with tax avoidance and endogenous labor supply By George Casamatta
  3. Optimal income taxation with tax avoidance By George Casamatta
  4. Payment Innovations, the Shadow Economy and Cash Demand of Households in Euro Area Countries By Hans-Eggert Reimers; Friedrich Schneider; Franz Seitz
  5. Offshore Tax Evasion and Wealth Inequality: Evidence from a Tax Amnesty in the Netherlands By Arjan Lejour; Simon Rabaté; Maarten van 't Riet
  6. Online Appendix to "Social Security Reform in the Presence of Informality" By Kathleen McKiernan
  7. Formal sector enforcement and welfare By Gareth Liu-Evans; Shalini Mitra
  8. Framing street vending in Guayaquil – Ecuador: from hegemonic discourses to a rights-based approach By Villacrés, Lisette; Geenen, Sara

  1. By: Sanjit Dhami; Hajimoladarvish
    Abstract: The evidence shows source-dependent entitlement to income sources and individuals are reluctant to part with income they feel more entitled to, e.g., earned labor income. Taxpayers may also be more reluctant to part with tax payments (evade more) from income sources they feel more entitled to- a form of mental accounting. We embed two main hypotheses within a rigorous theoretical model based on prospect theory. From incomes sources they feel more entitled to, taxpayers experience (i) greater loss aversion from paying taxes, and (ii) lower moral costs of evasion. We confirm the predictions of our model through MTurk experiments. Evasion is increasing in the tax rate and decreasing in the audit penalty. Moral costs influence taxpayers decisions. Loss aversion, measured “directly” for the first time for each individual in an evasion experiment, reduces evasion, as predicted by our theory. Loss aversion, risk aversion, and their interaction, are critical determinants of evasion.
    Keywords: mental accounting, tax evasion, loss aversion, morality, prospect theory, risk-aversion
    JEL: C91 C92 D82 D91 G21
    Date: 2020
  2. By: George Casamatta (Laboratoire Lieux, Identités, eSpaces et Activités (LISA))
    Abstract: We determine the optimal income tax schedule when individuals both determine endogenously their labor supply and have the possibility of avoiding paying taxes. Considering a convex concealment cost function, we propose a formula for the optimal marginal tax rate, that generalizes the standard Mirrlees formula to the case of tax avoidance. We also show that the results obtained by (2020) in the fixed income case hold true when labor supply is endogenous: with a low enough marginal cost of avoidance, part of the taxpayers, located in the interior of the skill distribution, optimally choose to avoid taxes.
    Keywords: tax avoidance, optimal income taxation
    JEL: H21 H26
    Date: 2020–06
  3. By: George Casamatta (Laboratoire Lieux, Identités, eSpaces et Activités (LISA))
    Abstract: We determine the optimal income tax schedule when individuals have the possibility of avoiding paying taxes. Considering a convex concealment cost function, we find that a subset of individuals, located in the interior of the income distribution, should be allowed to avoid taxes, provided that the marginal cost of avoiding the first euro is sufficiently small. This contrasts with the results of Grochulski (2007) who shows that, with a subadditive cost function, all individuals should declare their true income. We also provide a characterization of the optimal income tax curve.
    Keywords: fiscal avoidance, optimal income tax
    JEL: H21
    Date: 2020–05
  4. By: Hans-Eggert Reimers; Friedrich Schneider; Franz Seitz
    Abstract: We analyze for the first time cash holdings of private households in all euro area countries from 2002 to 2019 within a panel cointegration framework. Besides the traditional determinants of cash demand like transactions balances and opportunity costs, we concentrate on cashless payments media as substitutes to cash payments and the role of the shadow economy. Moreover, we take due account of country-specific repercussions of the financial and economic crisis of 2008/09, time series properties and distinguish between small and large countries. We find a significant and positive relationship among households' cash holdings, the volume of transactions and the size of the shadow economy irrespective of country size for all euro area countries over our sample period. Additionally, there is a substitution relationship between the accessibility and availability of cashless payments media and cash demand. And a decreasing number of ATMs reduces cash holdings. These results have important political and financial implications.
    Keywords: cash, cashless payments, shadow economy, cash demand function, panel cointegration
    JEL: C23 E41 E58
    Date: 2020
  5. By: Arjan Lejour (CPB Netherlands Bureau for Economic Policy Analysis); Simon Rabaté (CPB Netherlands Bureau for Economic Policy Analysis); Maarten van 't Riet (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: As long as there have been taxes, people have tried to avoid and evade them. Interest in these phenomena has been fueled by the effects on public revenues, as well as on the distribution of wealth and income. One prominent example of tax evasion is the hiding of wealth and income in tax havens. According to estimates by Zucman (2013), 8% of global financial wealth, or $5.9 trillion, is held in tax havens. During the global financial crisis of the late 2000s, the G20 countries vowed to tackle offshore tax evasion and proclaimed the end of the “era of banking secrecy”. In recent years, leaks containing confidential information from financial institutions as well as academic research investigating leaks and tax amnesties have confirmed the popular narrative that tax evasion is concentrated among the wealthiest in society (Alstadsæter, Johannesen and Zucman, 2018, 2019). This does not only affect public revenues, but also the measurement of wealth and income inequality. We use unique microdata to study tax evasion in the Netherlands. We have received data on over 27,000 participants to the Dutch tax amnesty between the years 2002 and 2018. In addition, we have data on households who appeared in recent information requests to 4 different Swiss banks. We link these data to administrative data on income, wealth, and demographics covering the entire Dutch population.
    JEL: H26 H87 E21
    Date: 2020–10
  6. By: Kathleen McKiernan (Vanderbilt University)
    Abstract: Online appendix for the Review of Economic Dynamics article
    Date: 2020
  7. By: Gareth Liu-Evans; Shalini Mitra
    Abstract: Tax enforcement consistently lowers informality in the literature whereas the evidence is mixed for other factors affecting informality. Using several different samples of countries corresponding to different development levels, we find Rule of Law, the proxy for tax enforcement, to have a significant and robust effect on informality according to the continuous treatment test due to Belloni et al. (2014), which allows for uncertainty in the set of control variables via the use of a heteroscedasticity-robust Lasso method. A general equilibrium framework with heterogeneous firms and financial frictions further shows enforcement is welfarereducing for low to moderate costs of enforcement.
    Keywords: Lasso, Informal sector, welfare, tax enforcement, borrowing constraints, tax evasion
    JEL: O11 O17 I30 H26
    Date: 2020–10
  8. By: Villacrés, Lisette; Geenen, Sara
    Abstract: Urban renewal policies that aim to “beautify” public space have had unequal impacts, particularly in terms of restricting access to public space for some groups considered to be “undesirable” in the new urban landscape. This paper concentrates on one such group, informal street vendors, who rely on access to the streets for generating an income, and who have been banned or in any case restricted from doing so. In several Latin American cities, street vending is a very important part of the informal economy. We present the case of Guayaquil, Ecuador’s second most populated city, which has undergone a radical urban renewal and gentrification process during the four tenures of former mayor Jaime Nebot (2000 to 2019). This has pushed street vendors further into peripheral areas of the city, and into informality, and has sparked ongoing conflict between street vendors and municipal authorities. Based on a discourse analysis and an analysis of national and local policies and regulations regarding street vending, we argue that street vending has been framed, consecutively, as a symbol of a chaotic past, as an expression of the right to work, and as entrepreneurship. These discourses translated into an array of policies that overall do not allow street vendors to successfully claim their access to public space. For that reason, this paper considers that the right to the city approach could open more transformational political avenues to enhance vendors’ claims over public space by acknowledging two rights: the right to appropriate public space and the right to participate in public decisions in the city.
    Keywords: Ecuador; street vending; informal economy; Guayaquil;
    Date: 2020–09

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