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on Informal and Underground Economics |
| By: | Pierre Bachas (Institute for Fiscal Studies and Berkeley Economics, University of California); Lucie Gadenne (Institute for Fiscal Studies and University of Warwick); Anders Jensen (Institute for Fiscal Studies) |
| Abstract: | Can consumption taxes reduce inequality in developing countries? We combine household expenditure data from 31 countries with theory to shed new light on the redistributive potential and optimal design of consumption taxes. We use the place of purchase of each expenditure to proxy for informal (untaxed) consumption. This enables us to characterize the informality Engel curve: we ?nd 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. We extend the standard optimal commodity tax model to allow for informal consumption and calibrate it to our data to study the effect of different tax policies on inequality. Contrary to consensus, we 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. Once informality is taken into account, commonly used redistributive policies, such as reduced rates on necessities, have a limited impact on inequality. In particular, subsidizing food cannot be justi?ed on equity or ef?ciency grounds in several poor countries. |
| Date: | 2020–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:20/14&r= |
| By: | Ibrahim Ngouhouo (University of Dschang, Cameroon); Loudi Njoya (University of Dschang, Cameroon); Simplice A. Asongu (Yaoundé, Cameroon) |
| Abstract: | The main objective of this paper is to contribute to in-depth literature on the relationship between growth and the informal sector in the presence of corruption. The impact of the interaction between growth and corruption on economic performance (increase or decrease of the informal sector) will be discussed. To the best of our knowledge, our paper is unique in the empirical literature because it studies the effect of the interaction between growth and corruption in the informal sector using a sample of developing countries. Our results based on the FE, system GMM, MG, AMG, and IV-2SLS for 112 countries between the 1991-2015 periods, show that growth reduces informality in the direct effect regression. Moreover, economic growth interacts with corruption and produces negative net effects up to a corruption threshold of 4.79745 when this effect is nullified. This negative net effect was found to be robust across different regional groupings and income groups except in the Middle East and North Africa (positive net effect) and high income and upper-middle-income countries (only direct effects) producing different thresholds per sample. The study recommends that policymakers should intensify their fight against corruption in their quest to reduce the size of the informal economy. |
| Keywords: | Informal sector, Growth, Corruption, Developing countries |
| JEL: | D73 F47 J46 O1 O17 O47 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:22/014&r= |
| By: | Loudi Njoya (University of Dschang, Cameroon); Ibrahim Ngouhouo (University of Dschang, Cameroon); Simplice A. Asongu (Yaoundé, Cameroon); Friedrich Schneider (Kepler University of Linz, Austria) |
| Abstract: | This paper is interested in explaining the causes of the simultaneous evolution between economic growth and informality. Using a large annual panel of African countries with a time series of 25 years, ours results show that when the corruption rate is above (below) a threshold of 1.3577, economic growth reduces (increases) informal economic sector. The corruption proxy is measured as a decreasing function of corruption such that higher levels of the corruption proxy translate lower levels of corruption. It is therefore desirable for policymakers to improve the transparency of interactions between firms, public and private agents to fight corruption, in view of decreasing the informal economic sector through economic growth. |
| Keywords: | Informal sector, Growth, Corruption, African countries |
| JEL: | D73 F47 J46 O1 O17 O47 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:22/012&r= |
| By: | Richard Adu-Gyamfi (Research Africa Network, Botswana); John Kuada (Aalborg University, Denmark); Simplice A. Asongu (Yaoundé, Cameroon) |
| Abstract: | It is a well-established practice of many Sub-Sahara African (SSA) governments to aid entrepreneurs within both the formal and informal sectors in order to enhance their performance and growth. Unfortunately, there is no agreed method by which governments can differentiate between entrepreneurs and target them with the appropriate promotion policies. Thus, despite the good intentions, entrepreneurship policy initiatives have been incorrectly targeted, poorly implemented and without the desired results, since different entrepreneurs may require different forms of assistance. Some scholars have suggested that without a context-specific classificatory guide, policymakers are unlikely to be accurate in their assessment of the growth capabilities of prospective candidates for specific promotion initiatives and this can explain some of the policy failures. This observation has motivated the present paper. Our objective is to provide a framework that helps identify the different contextual dimensions influencing formal and informal enterprise creation processes in SSA. |
| Keywords: | entrepreneurship; formal; informal; Africa |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:22/015&r= |
| By: | George Kudrna; John Piggott; Phitawat Poonpolkul |
| Abstract: | This paper examines the economy-wide effects of government policies to extend public pensions in emerging Asia particularly pertinent given the region’s large informal sector and rapid population ageing. We first document stylized facts about Indonesia’s labour force, drawing on the Indonesian Family Life Survey (IFLS). This household survey is then used to calibrate micro behaviours in a stochastic, overlapping-generations (OLG) model with formal and informal labour. The benchmark model is calibrated to the Indonesian economy (2000-2019), fitted to Indonesian demographic, household survey, macroeconomic and fiscal data. The model is applied to simulate pension policy extensions targeted to formal labour (contributory pension extensions to all formal workers with formal retirement age increased from 55 to 65), as well as to informal labour (introduction of non-contributory social pensions to informal 65+). First, abstracting from population ageing, we show that: (i) the first set of pension policy extensions (that have already been legislated and are being implemented in Indonesia) have positive effects on consumption, labour supply and welfare (of formal workers) (due largely to the formal retirement age extension); (ii) the introduction of social pensions targeted to informal workers at older age generates large welfare gains for currently living informal elderly; and (iii) the overall pension reform leads to higher welfare across the employment-skill distribution of households. We then extend the model to account for demographic transition, finding that the overall pension reform makes the contributory pension system more sustainable but the fiscal cost of non-contributory social pensions more than triples to 1:7% of GDP in the long run. As an alternative, we examine application of a means-tested social pension system within the overall pension reform. We show that this counterfactual reduces the fiscal cost (of social pensions) and further increases the welfare for both current and future generations. |
| Keywords: | Informal Labour; Population Ageing; Social Security; Taxation; Redistribution; Stochastic General Equilibrium |
| JEL: | E26 J1 J21 J26 H55 H24 C68 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:pui:dpaper:171&r= |
| By: | Lehner, Lukas; Ramskogler, Paul; Riedl, Aleksandra |
| Abstract: | Does the structure of labor markets – and the possibility to employ temporary workers – a↵ect aggregate wage growth? After the global financial crisis (GFC) a rich debate had ensued about the reasons for the delayed pick up of wage growth. However, structural labor market aspects remained strangely absent from this discussion. We contribute by incorporating labor market dualization into the standard Phillips curve model to explain wage growth in 30 European countries in the period 2004-2017. We find that the presence of workers with temporary contracts in Europe's labor markets slows down aggregate wage growth due to the competition that temporary workers exert on permanent workers. This competition e↵ect is most pronounced in countries, where trade union density is low. Moreover, we establish that labor market dualization has been at least as important in slowing wage growth since the GFC as unemployment, i.e. the observed flattening of the Phillips curve. |
| Keywords: | Wage Growth, Labor Market Dualization, Involuntary Temporary Work, Phillips Curve, Competition effect |
| JEL: | J31 J42 J82 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:amz:wpaper:2022-04&r= |
| By: | ferrara, giancarlo; campagna, arianna; bucci, valeria; atella, vincenzo |
| Abstract: | Presumptive taxation methods are policy tools widespread adopted by fiscal authorities with the aim to improve voluntary tax compliance and to fight tax evasion. Such methods allow authorities to uncover firms’ under-reporting, but face several limits. In particular, presumptive taxation methods do not allow to disentangle when the presence of under-reporting is ascribable to tax evasion behaviour or to the lack of managerial skills and inefficiency. To overcome the main presumptive taxation weakness, we propose combining presumptive frameworks with a measure of technical efficiency, thus developing an integrated approach for tax evasion analysis able to support the audit activities of fiscal authorities. Further, we provide some considerations in terms of tax compliance and support our approach with evidence obtained from an empirical application based on Italian firms. |
| Keywords: | Tax Compliance, Presumptive Taxation, Efficiency, Stochastic Frontier, Business Sector Studies |
| JEL: | C14 D24 H26 H32 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:111516&r= |
| By: | Narciz Balasoiu (Academy of Economic Studies, Faculty of International Business, Bucharest, Romania) |
| Abstract: | The development of world trade along with accelerated globalization has an effect not only on economic development or the strengthening of international cooperation, but also facilitated sophisticated mechanisms by which the payment of tax obligations by multinational companies is circumvented. Transfer pricing and tax havens, considered both individual and combined practices, negatively affect a country's ability to implement fiscal policy and improve budget revenue collection capacity. The problem is even greater in the case of states with a fragile economy, where the dynamics of development is vitally related to the elimination of legal, immoral or illegal tax evasion practices. The Transfer pricing mechanism has also been optimized to handle taxable transactions between companies affiliated to a particular group. Multinational companies avoid taxes by overestimating imports and underestimating exports, thus managing to distribute revenues in various regions of the globe that have great tax advantages. |
| Keywords: | tax havens, profit shifting, tax evasion, corporation, fiscal legislation |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:smo:lpaper:0049&r= |
| By: | Etienne Romsom |
| Abstract: | This paper, the first of two on global oil theft and fraud, discusses the prevalence, methods, and consequences of global oil theft, valued at US$133 billion per year and equivalent to 5-7 per cent of the global market for crude oil and petroleum fuels. However, the impact of oil theft is significantly larger than the value of theft itself. Government tax yields have been assessed for 30 developing countries associated with oil theft and found to be significantly lower than in the International Monetary Fund's benchmark study. |
| Keywords: | Oil, Fuel, Corruption, Crime, Domestic revenue mobilization, Tax evasion, Tax avoidance |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp-2022-16&r= |
| By: | Schmoll, Moritz |
| Abstract: | What drives ineffective tax collection in developing countries? This widespread phenomenon has been explained by weak ‘state capacity’, rent-seeking bureaucrats, or the influence of political elites. More recently, scholars have also emphasised the role of ‘moral economies’, shared notions of what constitutes fair and legitimate taxation that prevent tax collectors from strictly enforcing the law. However, the literature has thus far missed the ways in which shared notions of what constitutes fair work and employment in the tax administration affect collection. Drawing on two years of fieldwork in Egypt, including ethnographic research among street-level tax collectors, the article finds that the simultaneous persistence and disappointment of historical expectations and feelings of entitlement to a white-collar, middle-class job renders tax collectors unwilling to carry out vital enforcement tasks, and further impedes the building of administrative capacity. Furthermore, the administrative leadership’s buying-into such narratives hollows out its capability to incentivise tax collectors to change their ways. These findings have important implications for our understanding of the micro-foundations of governance and state capacity, underscoring the role of normative-ideational factors not only in shaping the willingness of taxpayers to pay taxes, but also of tax collectors to collect them. |
| JEL: | E6 |
| Date: | 2020–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:104601&r= |
| By: | Ebele S. Nwokoye (Nnamdi Azikiwe University Awka, Nigeria); Clement I. Igbanugo (University of Benin, Nigeria); Chukwunonso Ekesiobi (Chukwuemeka Odumegwu Ojukwu University, Nigeria); Stephen K. Dimnwobi (Nnamdi Azikiwe University Awka, Nigeria) |
| Abstract: | The study investigates the impact of fiscal incentives on the tax compliance behaviour of firms in industrial clusters in Nigeria. Data from 800 firms drawn from three industrial clusters in South-East Nigeria were collected using a structured questionnaire through a multi-stage sampling procedure. Descriptive statistics and the logistic regression model were applied to estimate the survey responses. The major findings of the study show that regular tax audit, firm size, simplifying the communication on tax requirement, communicating deterrent messages, educational attainment of the firm owner and political legitimacy of the current government as well as fiscal incentives (tax credit, tax reduction, capital allowance, investment incentives) significantly influence the tax compliance behaviour of firms in Nigeria’s industrial clusters. Similarly, the study finds that fiscal incentives significantly enhance firm performance in Nigeria’s industrial clusters. Implications and policy suggestions are presented for adoption by concerned stakeholders in the tax and industrial sectors. |
| Keywords: | Fiscal incentive, Tax compliance, Industrial Cluster, Nigeria |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:exs:wpaper:22/008&r= |
| By: | Das, Satadru (Reserve Bank of India); Gadenne, Lucie (University of Warwick, Institute for Fiscal Studies and CEPR); Nandi, Tushar (Indian Institute of Science Education and Research (IISER), Kolkata); Warwick, Ross (Institute for Fiscal Studies) |
| Abstract: | This paper investigates the effect of electronic payments technology on firms' tax compliance in a large developing economy. We consider India's demonetization policy which, by limiting the availability of cash, led to a large increase in the use of electronic forms of payments. Using administrative data on firms' tax returns and variation in the strength of the demonetization shock across local areas, we find that greater use of electronic payments leads to firms reporting more sales to the tax authorities. This effect is strong enough to explain roughly half of the large (11%) increase in reported sales observed during demonetization. |
| Keywords: | tax compliance ; electronic payments ; demonetization JEL Classification: H26 ; O23 ; H25 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1393&r= |
| By: | Asongu, Simplice; Soumtang, Valentine; Edoh, Ofeh |
| Abstract: | This study assesses financial determinants of informal financial sector development in 48 Sub-Saharan African countries for the period 1995-2017. Quantile regressions are used as the empirical strategy which enables the study to assess the determinants throughout the conditional distribution of informal sector development dynamics. The following financial determinants affect informal financial development and financial informalization differently in terms of magnitude and sign: bank overhead costs; net internet margin; bank concentration; return on equity; bank cost to income ratio; financial stability; loans from non-resident banks; offshore bank deposits and remittances. The determinants are presented from a plethora of perspectives, inter alia: U-Shape, S-Shape and positive or negative thresholds. The study not only provides a practical way by which to assess the incidence of financial determinants on informal financial sector development, but also provides financial instruments by which informal financial development can be curbed. |
| Keywords: | Informal finance; financial development; Africa |
| JEL: | G2 O1 O55 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:111559&r= |
| By: | Samuel Jaramillo |
| Abstract: | Uno de los rasgos característicos de las ciudades latinoamericanas consiste en los agudos contrastes que muestran tanto en lo físico como en lo social y económico. Distintas tradiciones teóricas se disputan en la región la interpretación del origen y de las repercusiones de este fenómeno, lo que ha alimentado un largo y rico debate en los estudios urbanos, económicos y sociales por casi medio siglo. Este volumen reúne cuatro ensayos de Samuel Jaramillo González, uno de los investigadores marxistas más destacados sobre la urbanización en el subcontinente. En el marco de la tradición marxista, plantea un esquema de interpretación que busca superar el dualismo positivista, al tiempo que da cuenta de las heterogeneidades y los entrelazamientos de sus componentes. Esto está planteado de una manera novedosa en tanto establece una articulación con las versiones actuales de la teoría marxista del valor trabajo abstracto, lo que amplía de manera muy auspiciosa las interpretaciones sobre el tema y multiplica las propuestas de acción. |
| Keywords: | Heterogeneidad, dualismo |
| Date: | 2021–09–07 |
| URL: | http://d.repec.org/n?u=RePEc:col:000490:019964&r= |