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on Informal and Underground Economics |
| By: | Asto, Richard; Ortiz Sosa, Marco Antonio; Ruelas-Huanca, Walter |
| Abstract: | This paper develops a general equilibrium framework that integrates heterogeneous firms with both idiosyncratic productivity and subjective beliefs about public goods provision—specifically, confidence in institutional quality—alongside endogenous informality. We examine the impact of tax policy on the formalization process and highlight the crucial role of firms' trust in public institutions. Our findings reveal that when firms perceive the government as credible, an increase in both tax rates and tax revenues enhances public goods provision, fostering greater formalization. However, in environments with weak institutional trust, formalization policies may yield suboptimal economic outcomes—potentially even worsening conditions compared to scenarios with higher trust levels. This underscores how institutional confidence influences the productivity of formal firms and facilitates their transition into the formal sector. In the long run, effective tax policy can improve overall welfare, but its success is contingent on government credibility. Our research contributes to the literature on informality by providing novel insights for policymakers seeking to enhance formalization and economic welfare, particularly in settings where skepticism about government commitment and institutional capacity prevails. |
| Keywords: | Informality, Optimal Tax Policy, Entrepreneurship, Tax Evasion |
| JEL: | E26 E62 H26 |
| Date: | 2025–01–29 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123490 |
| By: | Herbert Schuetze (Department of Economics, University of Victoria); Brianna Perry |
| Abstract: | Technological advancements are expanding self-employment opportunities, but recent economic shocks have highlighted the risks and consequences of failure on the self-employed. Despite this, few studies have studied the income or labour market consequences of business failure in Canada. Using longitudinal data from the Canadian Survey on Labour and Income Dynamics (SLID) for 2005 to 2010, we examine the short-term labour market consequences and immediate income effects of business failure compared to similar wage employees who involuntarily lose their jobs. Perhaps due to financial pressures, own account (do not employ paid workers) unincorporated self-employed job losers are more likely to be employed one year post job loss, but less likely to work full-time, relative to wage employed job losers. Moreover, self-employment spells ending in failure are still a major predictor of working outside wage employment one year post job loss compared to similar wage employed job losers. We find that, relative to wage employed job losers, self-employed job losers experience larger reductions in weekly income immediately following job loss. Full-time own account unincorporated self-employed workers are especially at risk of income disruption due to business failure relative to similar full-time wage employed job losers. JEL Classification: J21, J22, J38, J48 |
| Keywords: | Self-employment, business failure, job loss, earnings, employment outcome |
| Date: | 2024–12–19 |
| URL: | https://d.repec.org/n?u=RePEc:vic:vicddp:2407 |
| By: | Rosella Levaggi; Francesco Menoncin; Andrea Modena |
| Abstract: | Tolerating tax evasion may increase debt less than an equivalent tax cut. In our model, utility-maximizing entrepreneurs earn income from risky production technologies and risk-free bonds. The government uses income taxes and bonds to finance its expenses. Entrepreneurs can evade taxes at the risk of being audited and fined. Aggregate tax evasion and debt-to-GDP are positively related in equilibrium. Nevertheless, reducing effective tax rates by tolerating evasion may generate a lower debt-to-GDP ratio (but also lower growth) than equivalent debt-financed nominal tax cuts. Policies are equivalent with log utility. |
| Keywords: | Dynamic tax evasion; general equilibrium; public debt. |
| JEL: | D5 E6 H2 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_623 |
| By: | Laura Montenbruck |
| Abstract: | This article provides evidence that increased salience of public service provision can strengthen the social contract and increase tax compliance in a low-capacity setting. I conduct a field experiment randomizing information about public service provision across 5, 494 property owners and tenants in Freetown, Sierra Leone. Receiving information increases property tax payments by 20% on average. The effect is driven by increases in tax compliance on both the extensive and intensive margin. Residents of low-value properties are 7–16 percentage points more likely to pay taxes when informed about public services that are both geographically accessible and respond to the citizens’ most urgent needs, suggesting a benefit-based approach to taxation. Revenue effects are largely driven by residents of high-value properties, who depend less on the public provision of services, and for whom the treatment seems to act as a more general signal of government performance. |
| Keywords: | Social contract, Property tax, Public services, Tax compliance |
| JEL: | H20 O23 D73 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_620 |