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on Informal and Underground Economics |
| By: | Hirofumi Takikawa (Faculty of Economics and Business Administration, Goethe University Frankfurt, GERMANY and Junior Research Fellow, Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN) |
| Abstract: | The United Nations' "2030 Agenda for Sustainable Development" highlights the importance of formalizing the informal economy, which could potentially increase tax revenues in developing countries. This paper investigates the impact of formalization on optimal tax schedules, emphasizing the need for redistributive incentives alongside formalization. Extending the Mirrlees model to incorporate government intervention against the informal economy, we propose an optimal tax formula. Quantitative analysis shows that aligning the tax schedule with formalization increases tax revenue and income transfers while maintaining social welfare. The result can be interpreted as an implicit cost of welfare-neutral formalization in terms of tax revenues and income transfers. Conversely, leaving the tax schedule unchanged undermines these benefits. This research provides insights into the design of optimal tax policies that incorporate formalization. |
| Keywords: | Informal economy; Formalization; Income tax; Redistribution |
| JEL: | E26 H21 H26 J46 O17 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2024-18&r= |
| By: | Ajzenman, Nicolás; Ardanaz, Martín; Cruces, Guillermo; Feierherd, Germán; Lunghi, Ignacio |
| Abstract: | Recent literature highlights a paradox in corruption prevention messaging: instead of reducing tolerance for corruption, such campaigns can inadvertently intensify it by priming the existence of corruption while failing to diminish citizens beliefs about government misbehavior. Building on Cheeseman and Peiffer (2022), which demonstrates that messages focused on combating corruption often backfire among individuals with preexisting negative perceptions of corruption, we posit that an effective strategy to mitigate backfiring involves shifting those pessimistic perceptions before delivering the corruption eradication messages. To test our hypothesis, we conducted a randomized survey experiment within the context of a major institutional reform to reduce tax agency corruption in Honduras. Results confirm the backfiring findings of previous literature, but also show that our approach effectively mitigates perceived corruption and diminishes the propensity for tax evasion, especially among skeptics. |
| Keywords: | corruption;tax administration;Tax evasion;Survey experiment |
| JEL: | C90 D90 H26 K42 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13555&r= |
| By: | Jarkko Harju (Tampere University); Kaisa Kotakorpi (Tampere University); Tuomas Matikka (VATT Institute for Economic Research); Annika Nivala (VATT Institute for Economic Research) |
| Abstract: | We analyze firm responses to risk-based tax audits – a central tool in regular tax enforcement – using full-population data on tax audits and tax returns in Finland. We find an immediate and persistent increase in reported profits by the audited firms after being audited compared to matched non-audited firms with a similar development in key outcomes before the audit. This is an indication of significant non-compliance in the baseline. We also examine the anatomy of non-compliance and find that both revenue and labor costs increase after audits, suggesting that some firms may follow a strategy of under-reporting their overall scale of operation. We use novel data on bankruptcy petitions and court decisions to investigate whether stricter tax enforcement has implications for real economic activity. We find a large increase in the likelihood of bankruptcy after audits among non-compliant firms, but no increase in bankruptcies for compliant firms. |
| Keywords: | tax compliance; tax evasion; tax enforcement; firm behavior |
| JEL: | H26 H32 H83 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:fit:wpaper:22&r= |
| By: | Luduvice, André Victor D.; Martinez, Tomás R.; Sollaci, Alexandre B. |
| Abstract: | This paper studies the effects of the minimum wage on the life cycle of firms. We first build a tractable model where heterogeneous firms have labor market power, invest in innovation, and choose formal or informal sectors. The model predicts that a minimum wage hike not only shrinks young and low-productivity firms but also lowers incentives to innovate, resulting in lower life cycle growth. We then test the predictions of the model using Brazilian administrative and census data leveraging the variation in exposure across establishments and municipalities to the large increase in the minimum wage between 1999 and 2010. At the establishment level, an increase in the minimum wage: i) decreases the growth rates of small and young establishments and ii) increases the growth rates of old and large establishments. When analyzing exposed municipalities, we observe an increase in the earnings of workers in both the formal and informal sectors, as well as informal employment. Our findings suggest that the minimum wage is a possible explanation for the decline in the importance of young establishments and business dynamism in Brazil. |
| Keywords: | Monopsony;Business Dynamism;Firm Heterogeneity;Minimum Wage;Informality |
| JEL: | J38 J42 E24 E26 L25 |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13444&r= |
| By: | Hammarstedt, Mats (Linnaeus University); Skedinger, Per (Research Institute of Industrial Economics (IFN)) |
| Abstract: | We examine immigrant self-employment in Sweden during 2011–2021 – a turbulent decade with a large influx of refugees into the country and the outbreak of the global COVID-19 pandemic. Four outcome variables are investigated: the probability of self-employment, the probability of entry into and exit from this state and earnings of the self-employed. This is done for different cohorts of immigrants from Africa and Asia and for different types of businesses, unincorporated and incorporated firms. We find that immigrants have lower business earnings and higher exit rates from self-employment than natives, which is in line with previous research. It also turns out that the period in which the immigrants arrived to Sweden and the type of business they are engaged in have important implications for outcomes. In most cases, outcomes are more favorable for the earliest of the three cohorts we study, those who came to Sweden up to the turn of the millennium, and less so for the latest arrivals during the turbulent decade. Moreover, immigrants in incorporated self-employment who arrived during 2011–2021 fared less badly, relative to earlier cohorts, in terms of business earnings than their counterparts in unincorporated businesses, while results concerning exits from self-employment are mixed in this respect. |
| Keywords: | Self-employment; Immigrants; COVID-19; Refugee crisis |
| JEL: | J15 J24 J71 |
| Date: | 2024–06–27 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:iuiwop:1497&r= |
| By: | SAWADA Yasuyuki; TANAKA Mari |
| Abstract: | In developing economies where business owners suffer from agency problems with workers, kinship may serve as an enforcement device for producing high-quality products. Using unique data collected from handwoven textile micro-enterprises in Lao PDR, we examine the effect of family workforce size-the number of the owner's relatives who can work for the business-on business performance. For identification, we exploit an exogenous variation in the gender composition of the owner's relatives, which determines family workforce size. We confirm that a larger family workforce significantly increases the share of family workers in the business, positively affecting labor productivity and value-added per product. As a potential channel, having a larger family workforce seems to enable owners to produce high-price products that they design by themselves rather than low-price products with standard designs, owing to strong trust between family workers and owners. This supports the hypothesis that working with family labor helps owners overcome design infringements. We also obtained suggestive experimental evidence that owners who design products by themselves have a lower labor demand for external workers. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:24061&r= |