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on Informal and Underground Economics |
| By: | Frederic Lambert; Andrea Pescatori; Frederik G Toscani |
| Abstract: | Labor market informality is a pervasive feature of most developing economies. Motivated by the empirical regularity that the labor informality rate falls with GDP per capita, both at business cycle frequency and in a cross-section of countries, and that the Okun's coefficient falls with the level of labor informality, we build a small open-economy dynamic stochastic general equilibrium model with two sectors, formal and informal, which can replicate these key stylized facts. The model is calibrated to Colombia. The results show that labor market and tax reforms play an important role in changing the informality rate but also caution against over-optimism - with low GDP per capita, informality will always be relatively high as there is insufficient demand for formal goods. Quantitatively we find that higher productivity in the formal sector is key in explaining the difference between Colombia and countries with significantly lower informality. We use the model to study how labor informality and labor market frictions mediate the cyclical response of the economy to shocks, including commodity price shocks which are particularly relevant in Latin America. Informality is shown to play an important role as a shock absorber with the informal-formal margin limiting movements in the employed-unemployed margin. |
| Keywords: | Total factor productivity;Labor;Labor markets;Business cycles;Unemployment;labor market,informality,business cycle,WP,commodity price shock,frictions affect labor market dynamics,GDP growth,sector TFP,labor market informality |
| Date: | 2020–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/256&r=all |
| By: | Luis Franjo; Nathalie Pouokam; Francesco Turino |
| Abstract: | In this paper we build a model of occupational choice with informal production and progressive income taxation. We calibrate the model to the Brazilian economy to evaluate the impact of removing financial frictions on informality. We find that financial deepening leads to a drop in the size of the informal sector (from 37 percent to 22 percent of official GDP), to an increase in measured TFP (by 4 percent), to an increase in official GDP (by 27 percent), to a decrease in tax evasion (by 17 percent) and to an increase in fiscal revenues (by 15 percent). When assessing the response of this policy at different levels of financial development, we find a non-linear relationship between the credit-to-GDP ratio on the one hand, and either the size of the informal economy, or GDP per capita on the other hand. We test these features with cross-country data and find evidence in favor of both types of non-linearity. We also investigate changes in the income tax progressitivity as an alternative policy and find it to be more effective in countries with a medium to high level of financial markets development. |
| Keywords: | Self-employment;Tax evasion;Financial frictions;Credit;Informal economy;WP,informal firm,firms informality,survival firm,ghost firm,parasite firm |
| Date: | 2020–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/211&r=all |
| By: | Castro, Juan Francisco (Universidad del Pacifico); Velásquez, Daniel (Universidad del Pacifico); Beltrán, Arlette (Universidad del Pacifico); Yamada, Gustavo (Universidad del Pacifico) |
| Abstract: | We carry out a randomized controlled trial to evaluate the effect of three different types of messages sent to taxpayers on their compliance with the rental income tax (direct effect) and the spillovers produced on payments related to the capital gains and the self-employment income taxes. One message highlights detection, another appeals to social norms, and the third type appeals to altruism. This is the first study to evaluate if these messages can produce spillovers across taxes and to perform a long-term follow-up. This is important to determine if the treatment increases tax revenues. We find that the message addressing detection produces a positive and permanent direct effect and a negative but transitory spillover on the other two taxes. Overall, it increases tax revenues by US$3.92 per dollar spent in the long run. The message appealing to social norms has no direct effect but produces a permanent negative spillover on the capital gains tax. Ignoring this spillover would have lead one to conclude that this message is innocuous when in fact produces a loss of US$ 5.20 per dollar spent in the long run. The message appealing to altruism produces a transitory negative effect and no spillovers, and has no effect on tax revenues in the long run. |
| Keywords: | social norms, altruism, tax evasion, randomized controlled trial, Latin America |
| JEL: | D91 K42 H24 H26 H41 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13974&r=all |
| By: | David R. Agrawal. (University of Kentucky); Dirk Foremny (UB - Universitat de Barcelona); Clara Martinez-Toledano (WIL - World Inequality Lab , Columbia Business School - Columbia University [New York]) |
| Abstract: | This paper analyzes the effect of wealth taxation on mobility and the consequences for tax revenue and wealth inequality. We exploit the unique decentralization of the Spanish wealth tax system in 2011—after which all regions levied positive tax rates except for Madrid—using linked administrative wealth and income tax records. We find that five years after the reform, the stock of wealthy individuals in the region of Madrid increases by 10% relative to other regions, while smaller tax differentials between other regions do not matter for mobility. We rationalize our findings with a theoretical model of evasion and migration, which suggests that evasion is the mechanism most consistent with all of the mobility response being driven by the paraíso fiscal. Combining new subnational wealth inequality series with our estimated elasticities, we show that Madrid's status as a tax haven reduces the effectiveness of raising tax revenue and exacerbates regional wealth inequalities. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wilwps:halshs-03093674&r=all |