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on Informal and Underground Economics |
| By: | James Alm (Department of Economics, Tulane University); Brian Erard (B. Erard & Associates) |
| Abstract: | An enduring problem in the analysis of tax evasion is the difficulty of its measurement. An especially troublesome component of tax evasion arises from informal suppliers, such as self- employed domestic workers, street-side vendors, and moonlighting tradesmen. We develop in this paper a new approach for estimating self-employment earnings of informal suppliers. Our methodology involves using national survey results on self-employment earnings within a carefully selected set of industry categories where informal activities are believed to be concentrated. Then, by comparing these national survey results on self-employment earnings to Internal Revenue Service statistics on the amounts actually reported for tax purposes, it is possible to estimate the extent of noncompliance within the selected industry categories. Our methodology relies on survey respondents being reasonably forthcoming about their earnings, which we are able to confirm through some validation exercises. |
| Keywords: | tax evasion, informal suppliers |
| JEL: | H26 C81 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1517&r=all |
| By: | De Giorgi, Giacomo; Ploenzke, Matthew; Rahman, Aminur |
| Abstract: | Firm informality is pervasive throughout the developing world, Bangladesh being no exception. The informal status of many firms substantially reduces the tax basis and therefore impacts the provision of public goods. The literature on encouraging formalization has predominantly focused on reducing the direct costs of formalization and has found negligible impacts of such policies. In this paper, we focus on a stick intervention, which to the best of our knowledge is the first one in a developing country setting that deals with the most direct and dominant form of informality, i.e. registration with the tax authority with a direct link to the country's potential revenue base and thus public goods provision. We implement an experiment in which firms are visited by tax representatives who deliver an official letter from the Bangladesh National Tax Authority stating that the firm is not registered and the consequential punishment if the firm fails to register. We find that the intervention increases the rate of registration among treated firms, while firms located in the same market but not treated do not seem to respond significantly. We also find that only larger revenue firms at baseline respond to the threat and register. Our findings have at least two important policy implications: i. the enforcement angle, which could be an important tool to encourage formalization; and ii. targeting of government resources for formalization to the high-end informal firms. The effects are generally small in levels and this leaves open the question of why many firms still do not register. |
| Keywords: | development.; Firms; informality |
| JEL: | H25 H26 O1 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10779&r=all |
| By: | Blaufus, Kay; Braune, Matthias; Hundsdoerfer, Jochen; Jacob, Martin |
| Abstract: | Previous research argues that law expresses social values and could, therefore, influence individual behavior independently of enforcement and penalization. Using three laboratory experiments on tax avoidance and evasion, we study how legality affects individuals' decisions. We find that, without any risk of negative financial consequences, the qualification of tax minimization as illegal versus legal reduces tax minimization considerably. Legislators can thus, in principle, affect subjects' decisions by defining the borderline between legality and illegality. However, once we introduce potential negative financial consequences, legality does not affect tax minimization. Only if we use moral priming to increase subjects' moral cost do we again find a legality effect on tax minimization. Overall, this demonstrates the limitations of the expressive function of law. Legality appears to be an important determinant of behavior only if we consider activities with no or low risk of negative financial consequences or if subjects are morally primed. |
| Keywords: | Expressive Law,Legality,Moral Appeals,Tax Avoidance,Tax Evasion,Real Effort Experiment |
| JEL: | M41 M48 H20 H30 Z18 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:201523&r=all |
| By: | James Alm (Department of Economics, Tulane University); Timothy R. Hodge (Department of Economics, Allegheny College); Gary Sands (Urban Planning Program, Wayne State University \end{minipage}); Mark Skidmore (Department of Agricultural, Food and Resource Economics, and Department of Economics, Michigan State University) |
| Abstract: | As the country reemerges from the real estate crisis, the City of Detroit, Michigan continues to struggle, and is currently in the midst of bankruptcy proceedings. Falling property values have led to significant reductions in property tax revenues. In addition, the rate of property tax delinquency in Detroit is 48 percent, resulting in uncollected tax revenues of about 20 percent. This high rate of tax delinquency results from a confluence of factors including limited tax enforcement, feelings of tax inequity, and failure to provide public services, all of which have contributed to a breakdown in the social contract between the City and its residents. In this paper we develop a theoretical model of the individual decision to become delinquent on one’s property tax payments. We then use detailed parcel-level data to evaluate the factors that affect both the probability that a property owner is tax delinquent and, conditional upon delinquency, the magnitude of the delinquency. Our estimates show that properties that have lower value, longer police response times, are non-homestead (non-owner occupied residential properties), have a higher statutory tax rate, have a higher assessed value relative to sales price, are owned by a financial institution or by a Detroit resident, are delinquent on water bills, and for which the probability of enforcement is low are more likely to be tax delinquent These findings can be used to inform policies targeted at improving tax compliance within the City. |
| Keywords: | property tax, delinquency, tax compliance |
| JEL: | H26 H71 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1508&r=all |
| By: | Prabir C. Bhattacharya |
| Abstract: | The paper addresses the question of optimal development of a developing economy. The framework presented, it is believed, can be of help in thinking about policies relating, inter alia, to population growth, inter-sectoral migration, agriculture-industry relationship, wages in different sectors, and income distribution in an inter-connected way in the context of optimal development of an economy with an informal sector. |
| JEL: | C02 C61 O11 O17 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:hwuedp:1504&r=all |
| By: | Prabir C. Bhattacharya |
| Abstract: | This paper reports additional results to those presented in an accompanying paper that set out a framework for thinking about optimal development of a developing economy with an informal sector. |
| JEL: | C02 C61 E27 O11 O17 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:hwuedp:1504a&r=all |
| By: | Stefania Ottone; Ferruccio Ponzano; Giulia Andrighetto |
| Abstract: | In this paper we study how people from different European countries would react, in terms of tax compliance, to institutional changes. We choose an experimental setting and we focus on two features of the tax system – efficiency and tax rate. We develop our analysis in three countries characterized by different systems: Italy, Sweden, UK. The main finding is that participants from different countries react with the same intensity to efficiency changes but not to increases in the tax rate. In all countries tax compliance decreases as tax rate increases, but the reaction is stronger in Italy and softer in UK. Policy implications – mostly focused on fiscal harmonization - follow. |
| Keywords: | tax compliance, fiscal harmonization, cross-country comparison, efficiency, tax rate |
| JEL: | C9 D31 H26 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:307&r=all |
| By: | Karlan, Dean (Yale University and Abdul Latif Jameel Poverty Action Lab); Ratan, Aishwarya Lakshmi (Yale University and Innovations for Poverty Action); Zinman, Jonathan (Dartmouth College and Innovations for Poverty Action) |
| Abstract: | The poor can and do save, but often use formal or informal instruments that have high risk, high cost, and limited functionality. This could lead to undersaving compared to a world without market or behavioral frictions. Undersaving can have important welfare consequences: variable consumption, low resilience to shocks, and foregone profitable investments. We lay out five sets of constraints that may hinder the adoption and effective usage of savings products and services by the poor: transaction costs, lack of trust and regulatory barriers, information and knowledge gaps, social constraints, and behavioral biases. We discuss each in theory, and then summarize related empirical evidence, with a focus on recent field experiments. We then put forward key open areas for research and practice. |
| JEL: | D12 D91 G21 O16 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:yaleco:118&r=all |
| By: | Beaman, Lori (Northwestern University and Innovations for Poverty Action); Karlan, Dean (Yale University and Innovations for Poverty Action); Thuysbaert, Bram (Ghent University and Innovations for Poverty Action) |
| Abstract: | High transaction and contracting costs are often thought to create credit and savings market failures in developing countries. The microfinance movement grew largely out of business process innovations and subsidies that reduced these costs. We examine an alternative approach, one that infuses no external capital and introduces no change to formal contracts: an improved "technology" for managing informal, collaborative village-based savings groups. Such groups allow, in theory, for more efficient and lower-cost loans and informal savings, and in practice have been scaled up by international non-profit organizations to millions of members. Individuals save together and then lend the accumulated funds back out to themselves. In a randomized evaluation in Mali, we find improvements in food security, consumption smoothing, and buffer stock savings. Although we do find suggestive evidence of higher agricultural output, we do not find overall higher income or expenditure. We also do not find downstream impacts on health, education, social capital, and female decision-making power. Could this have happened before, without any external intervention? Yes. That is what makes the result striking, that indeed there were no resources provided nor legal institutional changes, yet the NGO-guided, improved informal processes led to important changes for households. |
| JEL: | D12 D91 O12 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:yaleco:136&r=all |