nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2023‒02‒13
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Search, Transport Costs, and Labor Markets in South Africa By Kishan Shah; Federico Sturzenegger
  2. The impact of COVID-19 on urban informal workers in Maputo By Nilifer Anaç; Eva-Maria Egger; Sam Jones; Ricardo Santos; Alex Warren-Rodriguez
  3. Estimating Income in a Tax Compliance Game. A Bayesian Persuasion Approach By Raphaela Hennigs
  4. Coming Clean on Your Taxes By Ruud A. de Mooij; Sebastian Beer
  5. Technology and Tax: Adoption and Impacts of E-services in Rwanda By Santoro, Fabrizio; Lees, Adrienne; Carreras, Marco; Mukamana, Theonille; Hakizimana, Naphtal; Nsengyiumva, Yves
  6. The Tax Response to COVID-19 in Ethiopia: Lessons for the Future By Akalu, Mulugeta; Gashaw, Misganaw; Asegid, Zerihun
  7. The Macroeconomic Consequences of Subsistence Self-Employment By Sergio Ocampo; Juan Herreño

  1. By: Kishan Shah (Center for International Development at Harvard University); Federico Sturzenegger
    Abstract: South Africa’s labor market exhibits a unique equilibrium with one of the highest unemployment rates in the world and yet a low level of informal employment. The unemployment rate has remained high and persistent over recent decades, in spite of the formal demise of the apartheid regime and subsequent transition to democracy in 1994. This paper uses a matching model of the labor market to argue that spatial considerations combined with low productivity of informal work may be responsible for such an outcome. Spatial dispersion inherited from the apartheid regime thins the labor market, creating exclusion and perpetuating spatial segregation. In most developing countries, the result would be higher employment in informal or own account employment. However, with low productivity in the informal sector, the high rate of exclusion shows itself in higher unemployment rates instead. Transportation costs and housing deregulation may become key factors in improving the working of the labor market in South Africa especially if it is not possible to raise informal productivity.
    Keywords: South Africa, labor markets
    Date: 2023–01
  2. By: Nilifer Anaç; Eva-Maria Egger; Sam Jones; Ricardo Santos; Alex Warren-Rodriguez
    Abstract: Informal self-employed traders in developing countries are vulnerable to shocks as they often lack access to social insurance or formal finance. This study investigates the impact of the COVID-19 pandemic on these urban traders in the capital of Mozambique, Maputo. Drawing on longitudinal phone survey data over six months, we find they experienced significant negative shocks to earnings, leading to a reduction in savings as well as worsening food security and assets.
    Keywords: COVID-19, Informal, Urban, Informal work, Mozambique
    Date: 2022
  3. By: Raphaela Hennigs
    Abstract: This paper studies the tax authority’s problem of how to estimate a tax payer’s income in a tax compliance game. The tax authority’s choice of how to estimate income is modelled using the Bayesian persuasion framework and assuming that income can be estimated arbitrarily precisely. I show that the tax authority can use income estimates as a commitment device: ex-post, the tax authority has an incentive to audit a tax payer if his income is estimated to be high. This allows the tax authority to increase tax compliance by strategically overestimating low income. If the probability with which low income is falsely estimated to be high is strictly positive, the tax authority audits a low income tax payer with a strictly positive probability. Anticipating to be audited with a sufficiently high probability, the tax payer prefers to report low and high income to avoid being audited and fined.
    Keywords: tax audits, tax compliance, information design, Bayesian persuasion
    JEL: D82 D83 H26
    Date: 2022–11
  4. By: Ruud A. de Mooij; Sebastian Beer
    Abstract: This paper develops a simple model to explore whether a higher detection probability for offshore tax evaders—e.g. because of improved exchange of information between countries and/or due to digitalization of tax administrations—renders it optimal for governments to introduce a voluntary disclosure program (VDP) and, if so, under what terms. We find that if the VDP is unanticipated, it is likely to be optimal for a revenue-maximizing government to introduce a VDP with relatively generous terms, i.e. a low or even negative penalty. When anticipated, however, the VDP is neither incentive compatible nor optimal, as it induces otherwise compliant taxpayers to evade tax. A VDP can then only be beneficial if tax evasion induces an external social cost beyond the direct revenue foregone, e.g., due to adverse effects on overall tax morale. In contrast to the common view that VDPs should come along with additional enforcement effort, we find that governments should relax enforcement if the VDP itself provides more powerful incentives to come clean.
    Keywords: Tax evasion; Voluntary disclosure program; Tax amnesty
    Date: 2023–01–13
  5. By: Santoro, Fabrizio; Lees, Adrienne; Carreras, Marco; Mukamana, Theonille; Hakizimana, Naphtal; Nsengyiumva, Yves
    Abstract: Many low-income countries are increasingly digitising various tax services, usually motivated by efforts to increase efficiency and transparency and reduce the burden of compliance for taxpayers. However, where awareness and adoption are suboptimal, tax e services may produce only partial benefits. In this paper, we examine the adoption of tax e-services in Rwanda, a low-income country which has invested significant resources in digitalising government service delivery and made tax e-services mandatory from 2015. Using a combination of panel survey and tax administrative data, we study the drivers and impacts of e-services awareness and adoption. We find evidence that, before the pandemic, female and less educated taxpayers, with less sophisticated businesses, were left behind in technology adoption, even where e-services were the only option for taxpayers. Exploiting the outbreak of COVID-19 during our data collection, we also study shifts precipitated by a shock that normalised digital transactions. Take-up of e-services is remarkable two years after the pandemic, but still not universal. For those not using the e services the same challenges in access persist – indicating the potential for more targeted policy interventions. Interestingly, technology adoption is not strongly related with filing behaviour, and we study the reasons why non-filers report using the tools and, on the contrary, why active filers report they do not. Also, we do not find any significant impact of e-services adoption on perceived fairness of the tax system and overall willingness to pay, which we hypothesised benefit from e-services. Finally, using evidence from qualitative interviews, we highlight practical challenges in using e-services, such as connectivity problems and slow systems, which undermine the potential benefits.
    Keywords: Governance,
    Date: 2023
  6. By: Akalu, Mulugeta; Gashaw, Misganaw; Asegid, Zerihun
    Abstract: The government of Ethiopia, like other governments, has provided tax response measures in order to mitigate the socio-economic impacts of COVID-19. These measures, among others, include a waiver of outstanding tax liabilities that taxpayers owe to the government; a tax amnesty or relief on interest and penalties for tax debt; and an extension of filing and tax payment deadlines. These tax measures were adopted with the purposes of helping affected businesses, to keep employees at work, to stimulate the economy and to reduce COVID-19 infections. To be effective, tax relief measures should have been targeted, temporary, speedy, abuse resistant, cost recoverable, predictable, reversible, scalable, easy to administer, resilient to health measures, and adapted to the specific needs of Ethiopia. The strong sides of the Ethiopian tax responses are their speedy nature and the fact that they consider the revenue space and address the status of the poor. The challenges observed on the design and enforcement of the tax measures include lack of adequate targeting, lack of prior assessment, administrative uneasiness, lack of records on the revenue loss, absence of monitoring and evaluation, and that they unfairly benefitted those who failed to comply with their tax duties. Prior assessment, targeted support, convenient response administration, coordination among the government organs, the need for the tax responses to be free from discrimination, the need for appropriate data recording, fair dispute settlement procedures and the need for a permanent disaster response department are suggested for similar incidents in the future.
    Keywords: Globalisation,
    Date: 2023
  7. By: Sergio Ocampo (University of Western Ontario); Juan Herreño (University of California San Diego)
    Abstract: We evaluate the aggregate effects of expansions of credit supply in environments where subsistence self-employment is prevalent. We extend a standard macro development model to include unemployment risk, which becomes a key driver of selection into self-employment. The model is consistent with the joint distribution of earnings and occupations, the reaction of wages to labor demand shocks, and the small effects of expansions in the supply of microloans on the earnings of the self-employed. We find that the elasticity of aggregate output to expansions in credit supply is proportional to the elasticity of individual earnings. This proportionality arises due to the muted effects of wages in general equilibrium in the presence of subsistence self-employment, and is not present in models without subsistence self-employment due to a larger wage response, and a larger crowding-out of private savings in response to a higher availability of credit.
    Keywords: Self-Employment, Unemployment, Development, Micro-Finance
    JEL: E44 O11 O16 O17
    Date: 2023

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