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on Informal and Underground Economics |
| By: | Alexander Hansak (University of Graz, Austria) |
| Abstract: | This paper studies how endogenous tax compliance changes the incidence of capital taxation when households earn heterogeneous returns. I develop an incomplete-markets heterogeneous-agent model in which households save, invest in entrepreneurial activities, and can conceal capital-side tax liabilities. Disciplined by U.S. evidence, the model quantifies how concealment creates a wedge between statutory and effective capital taxation and how this wedge interacts with return heterogeneity, the statutory tax rate, and the choice of tax base. Changing the tax base generates a substantial endogenous compliance response: replacing the capital-income tax with a revenue-equivalent wealth tax reduces the liability-weighted concealment rate from 15.9% to 3.3% and raises long-run welfare. The difference between statutory and effective taxation also becomes increasingly important at high capital-income tax rates. At a 40% statutory rate, output is nearly 7% higher with endogenous evasion than under perfect compliance, while capital-tax revenue is about one third lower. Finally, transition dynamics under a balanced-budget fiscal closure reveal a distinct fiscal-timing margin. Abolishing capital-income taxation raises long-run welfare but lowers welfare of households alive at implementation, whereas the wealth-tax replacement raises welfare both at implementation and in the long run. The incidence of capital taxation therefore depends jointly on statutory tax policy, endogenous compliance, and the dynamics of fiscal adjustment. |
| Keywords: | Tax evasion, Tax enforcement, Capital income taxation, Wealth taxation, Heterogeneous returns, Wealth inequality |
| JEL: | H21 H22 H26 E21 E22 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:grz:wpaper:2026-20 |
| By: | Usama Abdul Rauf (Pakistan Institute of Development Economics); Rafia Ali (Pakistan Institute of Development Economics) |
| Abstract: | Pakistan's large shadow economy remains key challenge to tax collection, quality of governance, and slow economic growth. Formalizing financial inclusion offers a strategic and evidence based trail by increasing trustful dependence on official, transparent and traceable system to shrink the size of shadow economy. This knowledge brief highlights the development of financial inclusion from 2008 to 2025. It also defines the underlying causes of the shadow economy and financial inclusion and the empirical insights by financial services contribute to the transfer of economic activities into the formal economy. Pakistan's still suffers from gaps across gender based exclusion, regional and income disparities despite a significant progress in branchless banking and digital payment platforms. Thus, cash remains a main medium of exchange leading to tax avoidance and informal economic activity. This brief suggest that reduction in shadow economy needs inclusive access and continuous usage of financial services for Pakistan's citizens. Therefore, with organized reforms, financial inclusion is a powerful tool to reduce informality and it will support long-term sustainable development. 1.Introduction Pakistan, the world's fifth most populous country and second populous in South Asia, still operating with a large shadow economy, basically the economy outside the official system. In 2024, a joint study conducted by the ILO and the SMEDA had estimated the shadow economy in Pakistan to be approximately 35-40% of the GDP, estimated at about US$457 billion. About 6% of the GDP is unreported annually. This weakens the inclusive growth and lowers government revenue. A significant number of traders do not register their business or workers and large number of workers remain unbanked. The high cash transactions enhances inequality and creates financial challenges for the country. Therefore, connecting individuals and businesses into documented economy through digital transactions, regi... |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:pid:kbrief:2026:143 |
| By: | Makaaru Arinaitwe, Jacklyn (Ace Policy Research Institute); Bogere, George (Ace Policy Research Institute); Fiore, Anna (World Bank); Herskowitz, Sylvan (World Bank); Lang, Megan (World Bank); Mwesigye, Francis (Uganda Development Bank); Nalumansi, Tracy (Nova SBE) |
| Abstract: | Childcare burdens limit productivity among women in the informal sector, but we know little about the optimal design of childcare support. We randomize 883 women market vendors in Kampala, Uganda to receive free workplace- or community-based childcare. Free childcare redistributes caregiving away from household members, raises women’s hourly earnings, and improves child development and women’s well-being. Community centers achieve higher utilization and larger gains in development and well-being, while workplace centers generate larger economic impacts. Both models have a high marginal value of public funds. Community centers currently dominate, but workplace-based centers could prove superior if operated at scale. |
| Keywords: | labor, childcare, gender, time use, early child development |
| JEL: | O12 O18 J13 J22 |
| Date: | 2026–09 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18910 |
| By: | Hoy, Christopher Alexander; Strehl-Pessina, Matias; Doino, Ruggero; Naidoo, Darian; Mambon, Kingtau; Kunda, Bobby |
| Abstract: | Tax exemptions for basic items exist worldwide, typically justified by governments as a way to reduce the cost of living for poorer households. This paper studies the unanticipated removal of consumption taxes on selected food items in Papua New Guinea. It conducts a difference-in-differences analysis using administrative data, a supermarket price census, web-scraped online prices, and a nationally representative household phone survey panel. The findings show complete pass-through in formal supermarkets in central urban districts, where retail competition is strong, but no pass-through in informal stores or rural areas, where poorer households mainly shop. Only 16 percent of the foregone revenue accrued to the poorest two quintiles, while the richest two quintiles and stores/wholesalers each captured almost 40 percent of the benefits. This degree of regressivity and variation in pass-through was unanticipated by 237 experts who participated in a prediction survey. Using a static marginal value of public funds–style comparison, the paper shows that universal cash transfers would generate roughly two and a half times as much quintile-weighted value per fiscal dollar as the tax exemption. The findings demonstrate that food tax exemptions are inherently regressive in lower-income settings, due to high informality, substantial market segmentation, and positive income elasticity of demand for basic food. |
| Date: | 2026–09–16 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11453 |
| By: | Gurung, Nirmal |
| Abstract: | The border between Nepal and India, which was opened in 1950 by the Treaty of Peace and Friendship, has created unprecedented conditions for developing cultural and social ties between the countries. However, the open border has also led to severe negative consequences for the national economy of Nepal. This research aims to discuss the effects of smuggling through the 1, 880 km border and analyse the situation in the context of the foreign trade deficit and the deteriorating economic situation in the country. Based on the data presented by the study, it is possible to draw the conclusion that smuggling contributes significantly to the trade deficit between Nepal and India. Smuggling of gold, drugs, agricultural products, and people constitutes a substantial part of trade between the countries. It is reported that 42.5% of the officially recorded trade between Nepal and India is smuggling, which results in a loss of 33.5 billion rupees for the Nepalese economy. In addition to the loss from unofficial trade, the state loses 3.58 billion rupees in duty and 3.71 billion rupees in value-added tax. The article also reports that the trade deficit in Nepal this year amounts to NPR 180 billion, of which a considerable part is caused by smuggling. Thus, the current situation in which Nepal allows free trade between the countries is extremely disadvantageous for the national economy. The study provides multiple examples that prove the severity of the problem, including the cases of Badhaiyatal and Bardibas, where the largest seizures of marijuana, gold, and peas in recent years were registered. According to official data, 30, 000 people are trafficked illegally into Nepal every year, resulting in significant losses for the economy. The causes of the problem include the initial policy of open borders, insufficient control mechanisms, corruption, and taxation issues. However, the authors of the article believe that a smart border is necessary to ensure the prosperity of the Nepalese economy through trade with India. |
| Date: | 2026–09–19 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:q4vwt_v1 |