nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2021‒05‒10
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Trade and Informality in the Presence of Labor Market Frictions and Regulations By Dix-Carneiro, Rafael; Goldberg, Pinelopi Koujianou; Meghir, Costas; Ulyssea, Gabriel
  2. Enforcement of Labor Regulation and the Labor Market Effects of Trade: Evidence from Brazil By Ponczek, Vladimir; Ulyssea, Gabriel
  4. Tax Evasion at the Top of the Income Distribution: Theory and Evidence By Guyton, John; Langetieg, Patrick; Reck, Daniel; Risch, Max; Zucman, Gabriel
  5. Tax Evasion and Market Efficiency: Evidence from the FATCA and Offshore Mutual Funds By Cheng, Si; Massa, Massimo; Zhang, Hong
  6. Technical Appendix: “Income Tax Evasion: Tax Elasticity, Welfare, and Revenue†By Max Gillman
  7. Trying to make a good first impression: A natural field experiment to engage new entrants to the tax system By Dong, Sarah Xue; Sinning, Mathias
  8. Transit Infrastructure and Informal Housing: Assessing an Expansion of the Medellin’s Metrocable System By Posada, H. M.; Garcia-Suaza, A. F.
  9. Estimación de la informalidad en México a nivel subnacional By Ibarra-Olivo, Eduardo; Acuña, José; Espejo, Andrés

  1. By: Dix-Carneiro, Rafael; Goldberg, Pinelopi Koujianou; Meghir, Costas; Ulyssea, Gabriel
    Abstract: We build an equilibrium model of a small open economy with labor market frictions and imperfectly enforced regulations. Heterogeneous firms sort into the formal or informal sector. We estimate the model using data from Brazil, and use counterfactual simulations to understand how trade affects economic outcomes in the presence of informality. We show that: (1) Trade openness unambiguously decreases informality in the tradable sector, but has ambiguous effects on aggregate informality. (2) The productivity gains from trade are understated when the informal sector is omitted. (3) Trade openness results in large welfare gains even when informality is repressed. (4) Repressing informality increases productivity, but at the expense of employment and welfare. (5) The effects of trade on wage inequality are reversed when the informal sector is incorporated in the analysis. (6) The informal sector works as an "unemployment," but not a "welfare buffer" in the event of negative economic shocks.
    JEL: F14 F16 J46 O17
    Date: 2021–01
  2. By: Ponczek, Vladimir; Ulyssea, Gabriel
    Abstract: How does enforcement of labor regulations shape the labor market effects of trade? Does the informal sector introduce greater de facto flexibility, reducing employment losses during bad times? To tackle these questions, we exploit local economic shocks generated by trade liberalization and variation in enforcement capacity across local labor markets in Brazil. In the aftermath of the trade opening, regions with stricter enforcement observed: (i) lower informality effects; (ii) larger losses in overall employment; and (iii) greater reductions in the number of formal plants. Regions with weaker enforcement observed opposite effects. All these effects are concentrated on low-skill workers. Our results indicate that greater de facto labor market flexibility introduced by informality allows both formal firms and low-skill workers to cope better with adverse labor market shocks.
    Keywords: Informality; Labor market flexibility; Trade
    JEL: F16 J32 J46
    Date: 2021–03
  3. By: Anthelme N'Dri (LAMPE - Laboratoire d'Analyse et de Modélisation des Politiques Economiques)
    Abstract: In this study, we estimate informal economy for Ivory Coast, country from subsaharan Africa. We did it through revisiting of main drivers of informal economy in this area. We use MIMIC methodology for done this and follow Dell'Anno and al. (2018) to calibrate estimate score of informal economy to informal economy as a percentage of GDP from 1991 to 2018. We found with strong evidence that Public Government spending, inflation, trade openness explains negatively informal economy and taxation rates, unemployment rates explain positively informal economy. This study has its place, and is welcome as it is difficult for government officials to gather data and to take public macroeconomic policy to lead struggle against informal economy which predominates in Ivory Coast economy at 90%. We build a database on informal economy for Ivory Coast from 1991 to 2018. Following our estimation, we found in 2015 that informal economy represents 26,700,000,000 USD.
    Abstract: Dans cette étude, nous estimons l'économie informelle pour la Côte d'Ivoire, pays d'Afrique subsaharienne. Nous l'avons fait en revisitant les principaux moteurs de l'économie informelle. Nous utilisons la méthodologie MIMIC pour ce faire et suivons Dell'Anno et al. (2018) pour calibrer le score estimé de l'économie informelle de 1991 à 2018. Nous avons trouvé comme résultat que les dépenses publiques, l'inflation, l'ouverture commerciale expliquent négativement l'économie informelle et le taux d'imposition, le taux de chômage expliquent positivement l'informel économie. Cette étude a sa place et est la bienvenue car il est difficile pour les responsables gouvernementaux de collecter des données et de mener de bonne politique macroéconomique publique pour mener la lutte contre l'économie informelle qui prédomine dans l'économie ivoirienne à 90%. Nous construisons donc dans cette étude, une base de données sur l'économie informelle pour la Côte d'Ivoire de 1991 à 2018. Suite à notre estimation, nous avons constaté en 2015 que l'économie informelle s'évaluait autour de 26 700 000 000 USD.
    Keywords: Informal economy,resource mobilization,MIMIC,indirect method
    Date: 2021–04–28
  4. By: Guyton, John; Langetieg, Patrick; Reck, Daniel; Risch, Max; Zucman, Gabriel
    Abstract: This paper studies tax evasion at the top of the U.S. income distribution using IRS micro-data from (i) random audits, (ii) targeted enforcement activities, and (iii) operational audits. Drawing on this unique combination of data, we demonstrate empirically that random audits underestimate tax evasion at the top of the income distribution. Specifically, random audits do not capture most tax evasion through offshore accounts and pass-through businesses, both of which are quantitatively important at the top. We provide a theoretical explanation for this phenomenon, and we construct new estimates of the size and distribution of tax noncompliance in the United States. In our model, individuals can adopt a technology that would better conceal evasion at some fixed cost. Risk preferences and relatively high audit rates at the top drive the adoption of such sophisticated evasion technologies by high-income individuals. Consequently, random audits, which do not detect most sophisticated evasion, underestimate top tax evasion. After correcting for this bias, we find that unreported income as a fraction of true income rises from 7% in the bottom 50% to more than 20% in the top 1%, of which 6 percentage points correspond to undetected sophisticated evasion. Accounting for tax evasion increases the top 1% fiscal income share significantly.
    Keywords: inequality; tax evasion; tax gap
    JEL: D63 H26
    Date: 2021–02
  5. By: Cheng, Si; Massa, Massimo; Zhang, Hong
    Abstract: Using the Foreign Account Tax Compliance Act (FATCA) as an exogenous shock that reduces the tax advantages of offshore funds sold to U.S. investors, we document that affected funds significantly enhance their performance as a response. This effect is stronger for funds domiciled in tax havens and for skilled funds with low flow volatility. Moreover, in generating additional performance, FATCA-affected funds also increase the price efficiency of their invested stocks. Our analysis has important normative implications in showing that curbing offshore tax evasion could help improve efficiency in both the global asset management industry and the security market
    Keywords: FATCA; Market Efficiency; Mutual funds; skills; tax evasion
    JEL: F36 G15 G23 H26
    Date: 2021–02
  6. By: Max Gillman (Department of Economics, University of Missouri-St. Louis)
    Abstract: A technical appendix for “Income Tax Evasion: Tax Elasticity, Welfare, and Revenue.†This paper provides a general equilibrium model of income tax evasion. As functions of the share of income reported, the paper contributes an analytic derivation of the tax elasticity of taxable income, the welfare cost of the tax, and government revenue as a percent of output. It shows how an increase in the tax rate causes the tax elasticity and welfare cost to increase in magnitude by more than with zero evasion. Keeping constant the ratio of income tax revenue to output, as shown to be consistent with certain US evidence, a rising productivity of the goods sector induces less evasion and thereby allows tax rate reduction. The paper derives conditions for a stable share of income tax revenue in output with dependence upon the tax elasticity of reporting income. Examples are provided with less and more productive economies in terms of tax elasticity of reported income, the welfare cost of taxation and the tax revenue as a percent of output, with sensitivity analysis with respect to leisure preference and goods productivity. Discussion focuses on how the tax evasion analysis may help explain such fiscal tax policy as the postwar US income tax rate reductions with discussion of tax acts and government fiscal multipliers. Fiscal policy with tax evasion included shows how tax rate reduction induces less tax evasion, a lower welfare cost of taxation, and makes for a stable income tax share of output.
    Keywords: income tax evasion, tax elasticity, welfare, tax revenue
    JEL: E13 H21 H26 H30 H68 K34 K42 O11
    Date: 2020–09
  7. By: Dong, Sarah Xue; Sinning, Mathias
    Abstract: Very little is known about the compliance behavior of first-time taxpayers although their tax paying habits may affect the long-run functioning of a tax system. This paper studies the compliance behavior of new entrants to the tax system using data from a large-scale natural field experiment that was implemented in collaboration with the Australian Taxation Office (ATO). We examine the effectiveness of a welcome letter from the tax authority that aims to nudge first-time taxpayers to lodge their first income tax return. We compare this letter to a standard letter that emphasizes the possibility of penalties and interest charges. We find that both letters have surprisingly similar effects on tax compliance, suggesting that the main channel through which the letters affect individual behavior is by providing information. By contrast, the type of messaging and the way in which information is presented to first-time taxpayers appear to be relatively unimportant. Our analysis of heterogeneous treatment effects indicates that both letters are most effective for young entrants to the tax system and, within this group, more effective for Australian citizens than for visa holders.
    Keywords: Tax compliance,natural field experiment,behavioral insights
    JEL: C93 H25 H26
    Date: 2021
  8. By: Posada, H. M.; Garcia-Suaza, A. F.
    Abstract: Transportation policies have an important incidence on the allocation of resources within cities. Therefore, investigating the impacts of transit investment is relevant especially in developing countries where informal housing is highly prevalent and spatial disparities are remarkable. We study the impact of a transit expansion of the Metrocable system in Medellín (Colombia) as a natural scenario to understand the causal links between lowering access cost and informal housing. Using a difference-in-difference identification strategy, we estimate that the expasion of Line H of Metrocable reduces informal housing up to 15 percentage points. We also show that the magnitude of the effect depends on the distance to the intervention. When exploring potential mechanisms mediating the analyzed causal relation we find that the labor market plays a crucial role.
    Keywords: Informal housing, Transportation cost, Land value, Informal labor market, Colombia
    JEL: R41 R42 R31 J46
    Date: 2021–04–22
  9. By: Ibarra-Olivo, Eduardo; Acuña, José; Espejo, Andrés
    Abstract: La informalidad laboral es una característica estructural de los mercados de trabajo en América Latina y el Caribe. Este fenómeno incide negativamente en los trabajadores, las empresas y en la sociedad en su conjunto. A finales de 2019, afectaba a 31,3 millones de personas en México, lo que representa el 56,2% de la población ocupada. La crisis sanitaria reciente causada por la pandemia de enfermedad por coronavirus (COVID-19) ha evidenciado la vulnerabilidad de los trabajadores en situación de informalidad laboral. Sin embargo, este fenómeno no es homogéneo en todo el territorio. Este documento presenta la estimación de informalidad en México a nivel subnacional, con un análisis de caracterización de las personas trabajadoras informales a nivel de entidad federativa y de municipio. Las estimaciones permiten determinar qué municipios son más propensos a la informalidad, pero, además, ayudan a entender cuáles son los elementos que la generan a nivel subnacional.
    Date: 2021–04–13

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