nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2023‒07‒24
eight papers chosen by
Catalina Granda Carvajal
Banco de la República

  1. Labor market search, informality, and on-the-job human capital accumulation By Matteo Bobba; Luca Flabbi; Santiago Levy; Mauricio Tejada
  2. Labour law and the informal economy in Vietnam subtitle By Barcucci, Valentina,; Bonnet, Florence,; Cooney, Sean,
  3. How to Design a Presumptive Income Tax for Micro and Small Enterprises By Jean-François Wen
  4. Tax Withholding and the Size of Government By Sutirtha Bagchi; Libor Dušek
  5. A Welfare Analysis of Tax Audits Across the Income Distribution By William C. Boning; Nathaniel Hendren; Ben Sprung-Keyser; Ellen Stuart
  6. The Untold Potential of India’s Informal Music Industry By Mansi Kedia; Mayank Manish; Aarti Reddy; Saptorshi Gupta
  7. Urban land markets and city development: Sub-Saharan Africa By Henderson, J. Vernon; Liu, Vivian
  8. Monitoring slums and informal settlements in Europe By KUFFER Monika

  1. By: Matteo Bobba (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Luca Flabbi; Santiago Levy; Mauricio Tejada
    Abstract: We develop a search and matching model where rms and workers produce output that depends both on match-specic productivity and worker-specic human capital. The human capital is accumulated while working but depreciates while searching for a job. Jobs can be formal or informal. The model is estimated on labor market data for Mexico. Human capital accumulation is responsible for more than half of the overall value of production, and upgrades more quickly while working formally than informally. Policy experiments reveal that human capital accumulation magnies the negative impact on productivity of the labor market institutions that give raise to informality.
    Keywords: Labor market frictions, Search and matching, Nash bargaining, Informality, Onthe Job human capital accumulation.
    Date: 2021–08
  2. By: Barcucci, Valentina,; Bonnet, Florence,; Cooney, Sean,
    Abstract: Abstract.
    Keywords: informal economy, labour law
    Date: 2023
  3. By: Jean-François Wen
    Abstract: Turnover taxes are prevalent in developing countries as a simple form of presumptive taxation of business income. Such simplified tax regimes can reduce the relatively high compliance costs of micro and small enterprises, which might otherwise discourage entrepreneurs from formalizing their activities and paying taxes. The note addresses design issues for a turnover tax regime—which taxes it replaces, what the criteria are for eligibility, how to determine the optimal threshold, and how to set the tax rate. A key observation is that, although low turnover tax rates may incite larger firms to artificially reduce their sales, the rate should also not be so high as to discourage formalization of activities. A table of tax rates and turnover thresholds observed internationally is provided. The note concludes by suggesting analytical steps to guide practitioners in designing turnover tax regimes.
    Keywords: Presumptive tax; turnover tax; informal sector; microenterprises; taxpayer Compliance cost; turnover tax rate; turnover tax systems; IMF library; Sales tax; Income and capital gains taxes; Income tax systems; Corporate income tax; Effective tax rate; Africa; South America; Eastern Europe; West Africa; Western Europe
    Date: 2023–06–29
  4. By: Sutirtha Bagchi (Department of Economics, Villanova School of Business, Villanova University); Libor Dušek (Charles University, Faculty of Law)
    Abstract: This paper examines the hypothesis that an improvement in tax collections causally leads to bigger government. We exploit the staggered introduction of withholding of the state personal income tax by U.S. states between 1948 and 1987 and find that withholding led to an increase in tax revenues by about 28 percent. We derive a theoretical model through which we interpret the estimates distinguishing between a mechanical increase in tax collections driven by reduced noncompliance, subsequent adjustments in revenue choices in response to that reduced noncompliance, and an increase in the underlying demand for revenue that may have motivated the adoption of withholding. Governments responded to the improvement in personal income tax collections by shifting the composition of revenues towards a heavier reliance on this tax. States also increased tax rates as they implemented withholding, which suggests that a need to raise more revenue was an important motive for adopting withholding.
    Keywords: Political economy of taxation; Size of government; Third-party reporting; Withholding
    JEL: H11 H21 H26 H71 N42
    Date: 2023–07
  5. By: William C. Boning; Nathaniel Hendren; Ben Sprung-Keyser; Ellen Stuart
    Abstract: We estimate the returns to IRS audits of taxpayers across the income distribution. We find an additional $1 spent auditing taxpayers above the 90th income percentile yields more than $12 in revenue, while audits of below-median income taxpayers yield $5. We draw upon comprehensive internal accounting information and audit-level enforcement logs to quantify the average costs and revenues associated with each audit. We begin by estimating the average initial return to all audits of US taxpayers filing in 2010-2014. On average, $1 in audit spending raises $2.17 in initial revenue. Audits of high-income taxpayers are more costly, but the additional revenue raised more than offsets the costs. Audits of the 99-99.9th percentile have a 3.2:1 return; audits of the top 0.1% return 6.3:1. We then exploit the 40% audit reduction between tax years 2010 and 2014 to examine the returns to marginal audits. We find they exceed the returns to average audits. Revenues remain relatively unchanged but marginal costs fall below average costs due to economies of scale. Next, we use randomly selected audits to examine the impact of an initial audit on future revenue. This specific deterrence effect produces at least three times more revenue than the initial audit. Deterrence effects are relatively consistent across the income distribution. This results in the 12:1 return above the 90th percentile. We conclude by estimating the welfare consequences of audits using the MVPF framework and comparing audits to other revenue raising policies. We find that audits raise revenue at lower welfare cost.
    JEL: H0
    Date: 2023–06
  6. By: Mansi Kedia (Indian Council for Research on International Economic Relations (ICRIER)); Mayank Manish (Indian Council for Research on International Economic Relations (ICRIER)); Aarti Reddy (Indian Council for Research on International Economic Relations (ICRIER)); Saptorshi Gupta (Indian Council for Research on International Economic Relations (ICRIER))
    Abstract: The ICRIER report on the Untold Potential of India’s Informal Music Industry measures the size, economic impact and potential of India’s informal music industry. Mapping the various stakeholders of the industry, including brass bands, local DJs, independent performers, live bands, sound engineers, music teachers and instrument manufacturers, the report provides an estimate of the value addition to India’s GDP from this sector. The analysis is based on quantitative and qualitative data collected through surveys, stakeholder consultations, and Focus Group Discussions (FGDs). The report also examines the challenges faced by the sector including the impact of COVID-19 pandemic and provides policy recommendations to help unleash the potential of India’s informal music industry.
    Keywords: informal economy, employment, music, media, creative industry, icrier
    Date: 2022–08
  7. By: Henderson, J. Vernon; Liu, Vivian
    Abstract: Rapidly growing cities in sub-Saharan Africa face immense population pressures. Weak institutions and outdated regulations inherited from the colonial era threaten to stifle their progress. This paper examines the institutions underlying the operation of urban land markets in Sub-Saharan Africa, focusing on property rights, the evolution of cities and their spatial layout, planning, and property taxes. Countries typically have a dual system of property rights, with in theory formal rights in cities, communal tenure in rural areas, and a transition between the two systems at growing city boundaries. However, large portions of cities operate outside these systems under informal rights. Using case studies and within city variation, we review the historical evolution of these systems in a number of African cities. We argue that cities lacking formal property rights tend to build lower and less intensively, often with slums persisting near the city center, where there is much higher value alternative use. We further explore the relationship between lack of owner occupancy and wealth inequality, as partially affected by the transition to private property rights. Next, we discuss the critical role of planning. Francophone countries for instance historically imposed comprehensive planning on urban land markets compared to Anglophone counterparts. This resulted in greater contiguity and density of land use, gridded urban layouts, and less leapfrogging in new developments. Where planning is weak, special initiatives such as sites and services may impose planning on certain greenfield neighbourhoods, with benefits accruing in the future. The paper then examines problems in property tax enforcement and collection, discussing reforms to improve collections. The paper concludes with a discussion of policy considerations and a research agenda.
    Keywords: land markets; urban planning; sub-Saharan Africa; urban development; colonialism
    JEL: H00 H26 O17 O18 P48 R10 R30
    Date: 2023–06–01
  8. By: KUFFER Monika
    Abstract: The extent of slums and informal settlements in Europe and their population numbers are smaller than in Africa, Asia, or Latin America. However, such areas exist in different forms across Europe. This report reviews common forms, summarized as a European typology of slums and informal settlements. Furthermore, the report provides an overview of Earth Observation (EO) techniques for the development of monitoring systems to track the progress of the ‘Leave No One Behind’ principle. Understanding common forms of slums and informal settlements is essential for developing national and local SDG 11 monitoring systems, because techniques need to respond to the specific morphologies of settlement types. A systematic literature review concluded that there are six common forms of slums and informal settlements in Europe: 1) Refugee camps, 2) Roma camps and other traveller settlements, 3) Non (permanent) residential buildings, 4) Substandard housing, 5) Low-density informal sprawl, and 6) High-density informal settlements. Overall, EO data (e.g., satellite images) allow for almost real-time updated spatial information with high spatial resolution. Combining EO data and municipal databases permits mapping the locations, dynamics, and characteristics of slums and informal settlements. However, developing spatial information systems need to be part of an engagement process to protect vulnerable groups and co-develop strategies for improving living conditions.
    Keywords: informal settlements, slums, housing, deprivation, earth observation, SDGs, Europe
    Date: 2023–06

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