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on Public Finance |
| By: | Canavire Bacarreza, Gustavo (World Bank); Herrero-Olarte, Susana (Universidad de Barcelona); Kim, Yeon Soo (World Bank) |
| Abstract: | This paper critically reviews the empirical and structural literature on the effects of income taxation on informal economic activity. Although labor taxation has been widely studied for labor market outcomes, evidence linking income taxes to informality remains fragmented and uneven across countries. Synthesizing findings from both developed and developing economies, the review finds that income taxes have limited effects on formal employment but significant impacts on labor informality, particularly in contexts with weak enforcement, fragile institutions, and highly vulnerable labor markets. Estimated elasticities of informality with respect to income taxation generally range between 3 and 5 percent, averaging around 3.5 percent. The literature, however, is skewed toward high-income countries and relies mainly on reduced-form empirical approaches, limiting understanding of behavioral responses, long-term dynamics, and institutional heterogeneity. Standard theoretical models, grounded in labor supply frameworks, often fail to treat informality as an endogenous margin under weak compliance and regulatory capacity. Consequently, studies may overstate revenue gains and understate distributional impacts. |
| Keywords: | income taxation, labor informality, developing economies, behavioral responses, labor markets, fiscal policy, critical review |
| JEL: | H22 H24 H26 J08 J21 J46 O17 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18449 |
| By: | Richiardi, Matteo; van de Ven, Justin; Popova, Daria; Brooks, Natasha |
| Abstract: | This paper describes the integration of labour supply behavioural responses into UKMOD, the UK tax-benefit microsimulation model belonging to the EUROMOD family. Traditional static models quantify only the direct (“morning after†) fiscal and distributional effects of policy reforms, abstracting from behavioural adjustment. We outline a practical framework for extending such models to incorporate indirect effects, with a focus on labour supply responses at both the intensive and extensive margins.After reviewing the evolution of the empirical literature on labour supply elasticities and the distinction between structural and reduced-form approaches, we motivate the adoption of an elasticity-based reduced-form method. While structural random utility models offer theoretically consistent counterfactual analysis, they are computationally demanding and less transparent for routine policy work. By contrast, externally estimated elasticities - widely used by UK institutions - provide a tractable and policy-aligned alternative.We detail the design of the Behavioural Responses (BVR) add-on introduced in UKMOD in 2023. The module computes marginal and average effective tax rates, distinguishes responses to changes in marginal versus average rates, and applies assumed taxable income elasticities to generate post-reform behavioural adjustments. Implementation requires a limited number of simulation loops and preserves transparency and computational efficiency. |
| Date: | 2026–03–04 |
| URL: | https://d.repec.org/n?u=RePEc:ese:cempwp:cempa4-26 |
| By: | Flora Bellone (Université Côte d'Azur, CNRS, GREDEG, France; OFCE, Sciences Po, France); Charlie Joyez (Université Côte d'Azur, CNRS, GREDEG, France); Xavier Poulet-Goffard (Université Côte d'Azur, CNRS, GREDEG, France) |
| Abstract: | The OECD's Base Erosion and Profit Shifting (BEPS) initiative, adopted in 2015, introduced country-by-country reporting (CbCR) obligations for multinational groups with consolidated turnover above €750 million. This paper examines whether the reform generated unintended behavioral responses among smaller firms below the reporting threshold. Using firm-level data on French multinationals from OFATS, FARE, and DIANE (2007, 2009, 2014–2022), we estimate difference-in-differences models in a linear probability framework with firm and year fixed effects. We focus on restructuring at the extensive margin, distinguishing entry into and exit from tax-haven jurisdictions. Firms below the threshold significantly increase their probability of opening tax-haven affiliates after 2016, the year CbCR started to be enforced in Europe, while larger firms become more likely to exit. The results are robust to alternative tax-haven definitions and to excluding firms near the cutoff. Heterogeneity analyses show that the post-reform entry in tax havens is concentrated among financially structured small MNEs. Overall, the findings suggest that targeted transparency reforms can reallocate tax-haven activity across the firm size distribution rather than uniformly reduce it. |
| Keywords: | tax avoidance; multinational enterprises; BEPS; country-by-country reporting; tax havens; firm heterogeneity |
| JEL: | F23 H26 H32 K34 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:gre:wpaper:2026-10 |