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on Informal and Underground Economics |
| By: | James Alm (Tulane University); Yongzheng Liu (Renmin University of China); Kewei Zhang (Renmin University of China) |
| Abstract: | Most analyses of tax evasion examine individual behavior, not firm behavior, given obvious and recognized data issues. We use data from the Business Environment and Enterprise Performance Survey to examine tax evasion at the firm level, focusing on a novel determinant of firm tax evasion: the financial constraints (or credit constraints) faced by the firm. Our empirical results indicate across a range of alternative specifications that more financially constrained firms are more likely to be involved in tax evasion activities, largely because evasion helps them deal with financing issues created by financial and credit constraints. We further show that the effects of financial constraints are heterogeneous across firm ownership, firm age, and firm size. Lastly, we present some suggestive evidence on the possible channels through which the impact of financial constraints on firm tax evasion may operate, including a reduction of information disclosure through the banking system, an increase in the use of cash for transactions, and an increase in bribe activities in exchange for tax evasion opportunities. |
| Keywords: | Tax evasion; financial constraints; firm-level data. |
| JEL: | E26 G2 H26 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1901&r=all |
| By: | James Alm (Tulane University) |
| Abstract: | In this paper, I review and assess what we have learned about what motivates individuals to pay - or to not pay - their legally due tax liabilities. I focus on three specific questions. First, what does theory say about what motivates tax compliance? Second, what does the evidence show? Third, how can government use these insights to improve compliance? I conclude with some suggestions - and some predictions - for future research. |
| Keywords: | Tax evasion; behavioural economics; controlled field experiments; laboratory experiments. |
| JEL: | H2 H26 D03 C9 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1903&r=all |
| By: | James Alm (Tulane University); William D. Schulze (Cornell University); Carrie Von Bose (Fors Marsh Group); Jubo Yan (Cornell University) |
| Abstract: | We use laboratory experiments to examine the impact of appeals to social norms on the compliance decisions of individuals. We test the effects of two main types of social norms: "descriptive norms", or the type of behavior that is typical or most frequently enacted, and "injunctive norms", or the type of behavior that "constitutes morally approved and disapproved conduct". In addition, for injunctive norms we introduce approval-framed and disapprovalframed injunctive norm messages. Our results indicate that normative appeals generally have a modest and positive impact on tax compliance, if not always statistically significant. The magnitude of both approval- and disapproval-framed injunctive norm messages is an increase of around 2 percent in reported taxes. |
| Keywords: | Tax compliance, social norms, experimental economics. |
| JEL: | H2 H26 H3 C91 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1902&r=all |
| By: | Marco Battaglini; Luigi Guiso; Chiara Lacava; Eleonora Patacchini |
| Abstract: | To study the role of tax professionals, we merge tax records of 2.5 million taxpayers in Italy with the respective audit files from the tax revenue agency. Our data covers the entire population of sole proprietorship taxpayers in seven regions, followed over seven fiscal years. We first document that tax evasion is systematically correlated with the average evasion of other customers of the same tax professional. We then exploit the unique structure of our dataset to study the channels through which these social spillover effects are generated. Guided by an equilibrium model of tax compliance with tax professionals and auditing, we highlight two mechanisms that may be behind this phenomenon: self-selection of taxpayers who sort themselves into professionals of heterogeneous tolerance for tax evasion; and informational externalities generated by the tax professional activities. We provide evidence supporting the simultaneous presence of both mechanisms. |
| JEL: | H26 K34 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25745&r=all |
| By: | Michael Masiya |
| Abstract: | The Malawi Revenue Authority (MRA) implemented the Voluntary Compliance Window (VCW) in 2013/2014 fiscal year as a means of bringing non-compliant taxpayers into the tax net. The programme was a huge success in terms of revenue and the cost of collection at 0.8% was by far below the 3% benchmark for the gross tax revenues of the Authority. However, the long-term compliance impact of the programme was not evaluated. Hence, the paper intends to bridge knowledge gap. Firstly, observing trends in debts and penalty payments covering and extending beyond the amnesty period, the paper finds that debts substantially declined after amnesty period while penalties rose sharply after VCW. Secondly, by constructing a counterfactual for large taxpayers, the paper finds that tax payments of participants significantly improved after the programme. Thirdly, the paper examines tax payment patterns by VCW participants one year after the programme. About 75 percent of amending filers subsequently paid their taxes one year after VCW with a higher mean income than the non-subsequent taxpayers. Lastly, the paper finds that smuggling remains high after observing variations in customs offences during VCW and a year later, in FY2015/16. The question remains “Should Malawi reconsider another Voluntary Compliance Window after 3 years?” The paper agrees with most previous studies by strongly discouraging another amnesty while encouraging post-amnesty enforcement efforts. |
| Keywords: | Malawi, voluntary compliance, tax amnesty |
| JEL: | H26 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7584&r=all |
| By: | Julien Albertini (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Arthur Poirier (Ministerio de Trabajo, Empleo y Seguridad Social, Argentina); Thepthida Sopraseuth (thepthida.sopraseuth@u-cergy.fr) |
| Abstract: | We shed light on the driving forces behind unemployment fluctuations and short-run changes in the informality rate on the Argentine labor market. Using Argentine survey data, we measure worker flows between formal employment, informal employment, unemployment and non-participation. We propose a methodology to correct for the discontinuity of Argentine survey data and that is able to compute consistent time series of quarterly ins and outs of informal work. Using variance decompositions and counterfactual exercises, we show that the ins and outs of informal employment are key drivers of labor market fluctuations. In particular, outflows from unemployment to informal employment account for 37% of fluctuations in the unemployment rate. In addition, our analysis suggests that informality is: (i) a flexible sector that is used in recessionary periods as a buffer against income losses and (ii) a stepping stone towards formal employment. The observed large changes in the informality rate are well explained by the change in job mobility between the formal and informal sectors as well as variations in hirings from unemployment and non-participation in the informal sector. |
| Keywords: | worker flows, informality, unemployment, business cycle, emerging market |
| JEL: | E24 E26 J6 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1916&r=all |
| By: | Enrique Alberola-Ila; Carlos Urrutia |
| Abstract: | Informality is an entrenched structural trait in emerging market economies, despite of the progress achieved in macroeconomic management. Informality determines the behavior of labour markets, financial access and the productivity of the overall economy. Therefore it influences the transmission of shocks and also of monetary policy. This paper develops a simple general equilibrium closed economy model with nominal rigidities, labor and financial frictions. Informality is captured by a dual labour market where the share of informal workers is endogenous. Only formal sector firms have access to financing, which is instrumental in their production process. Informality has a buffering effect on the propagation of demand and supply shocks to prices; the financial feature of the model exacerbates the impact of financial shocks in the formal sector while the informal sector is in principle unaffected. As a result informality dampens the impact of demand and financial shocks on wages and inflation but heighten the impact of technology shocks. Informality also increases the sacrifice ratio of monetary policy actions. From a Central Bank perspective, the results imply that the presence of an informal sector mitigates inflation volatility for some type of shocks but makes monetary policy less effective. |
| Keywords: | informality, inflation, monetary policy |
| JEL: | E26 E31 E52 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:778&r=all |
| By: | Nesma Ali (Heinrich-Heine University Düsseldorf); Boris Najman |
| Abstract: | This paper investigates the role of informal firms’ competition in determining the micro-level effect of cronyism on formal-firms’ productivity in the aftermath of the 2011 Egyptian revolution. Based on the World Bank panel Enterprise Surveys, we follow a constructive approach to indicate politically connected firms based on the findings of the previous literature. Using a propensity score reweighting – difference-in-difference estimator, we find that being a crony firm after the revolution could generate unsustainable gains in terms of productivity. This is mostly due to cronyism externalities that engenders a stronger intensity of informal competition, which jeopardizes any increase in productivity and creates a large disequilibrium at the firm level. We also provide evidence that crony firms’ excess in labor is the main channel through which this effect occurs. Hence, crony firm survival in Egypt depends on their ability to balance between the sustain provision of privileges and the threats imposed by the growth of the informal sector. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:erg:wpaper:1292&r=all |
| By: | Junankar, Pramod N. (Raja) (University of New South Wales) |
| Abstract: | In this paper we explore the role of the sectoral composition of gross domestic product (GDP) in explaining the behaviour of youth labour markets. We provide a comparison of the behaviour of youth unemployment rates, employment-population rates, and labour force participation rates between developing countries and developed (rich) countries. In developing countries, open unemployment is less of a problem: the major problem faced by young people is employment in the informal sector that is poorly paid, intermittent, and insecure. A major part of employment in developing countries consists of "vulnerable employment". After a brief review of the literature, the paper uses panel data to estimate equations for unemployment rates, employment-population rates, and labour force participation rates for youths. We find that the sectoral composition of production and aggregate demand are important in explaining the behaviour of youth labour markets. |
| Keywords: | youth labour markets, sectoral composition, informal employment |
| JEL: | O11 J21 O17 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12256&r=all |
| By: | Maia Sieverding (American University of Beirut); Rania Roushdy; Rasha Hassan; Ahmed Ali |
| Abstract: | In Egypt it is estimated that the majority of the country’s 40 million urban residents, which include 11 million young people, live in informal urban areas. Previous studies have demonstrated that there is considerable diversity in informal areas in terms of physical characteristics and basic infrastructure, yet there has been much less research assessing access to health and social services in informal areas. Young people growing up in informal areas are a particularly vulnerable group, and their access to such services is critical for their wellbeing and human capital development. In this paper, we use a mixed methods approach to assess different dimensions of youth access to health, education and cultural/recreational services across informal areas of Greater Cairo. Results from the Survey of Young People in Egypt – Informal Greater Cairo showed that youth perceptions of the geographic accessibility and affordability of services was generally high, but perceptions of service quality were considerably lower. There was also inequality in perceptions of the geographic accessibility of services by neighborhood-level wealth status, particularly for education and health services. A more in-depth case study of service access in informal areas of Shubra el Kheima, which is part of Greater Cairo, highlighted that concerns about service quality in informal areas should be contextualized within young people’s broader sense of marginalization and neglect of the area. We conclude that policy towards upgrading of informal areas in Cairo needs to adopt a more comprehensive and participatory approach that addresses health and social services as well as basic infrastructure. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:erg:wpaper:1289&r=all |
| By: | Mohammed Elhaj Mustafa (University of Kassala); Ebaidalla Mahjoub Ebaidalla |
| Abstract: | This study investigates the factors that influence the participation of the informal workers in health insurance program in two Sudanese states, namely, Kassala and Khartoum. To this end, the study relies on primary data collected from 742 informal workers in these two states. Both qualitative and quantitative techniques have beenadopted to carry out the intended investigation. The analysis indicates that factors such as respondent’ age, wealth status, chronic disease status, morbidity, health insurance awareness, health-seeking behavior and proximity to health care facilities arethe most significant factors affecting informal workers’ engagement in health insurance system. The result also reveals that being residing in urban areas lowers the probability of joining health insurance membership in the full, Kassala and Khartoum samples. Both monetary income and average years of schooling are found to contribute positively in raising the likelihood of voluntary enrollment in health insurance. These findings still hold under different robustness checks, confirming the existence of barriers that prevent a huge portion of the informal workers from voluntary enrollment in health insurance. Finally, the paper ends with some recommendations aimedat enhancing the role of NHIF in accommodating the informal workers and achieving universal health coverage. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:erg:wpaper:1300&r=all |