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on Informal and Underground Economics |
| By: | Feng Wei; Jean-François Wen |
| Abstract: | Turnover (sales) is frequently used in developing countries as a presumptive income tax base, to economize on the costs of tax administration and taxpayer compliance. We construct a simple model where a size threshold separates firms paying turnover tax from those paying profit tax (regular income tax), and where firms have the option of producing in the untaxed, informal sector. The optimal turnover tax rate trades off two policy concerns: reducing informality and avoiding strategic reductions in sales by firms seeking to remain below the threshold for the profit tax. We provide analytical results and calibrate the model to compute the optimal policy using realistic parameter values. The optimal turnover tax rate for countries with large informal sectors is found to be around 2.5% across most scenarios, while the threshold separating the turnover tax regime from profit tax lies for the most part between $65, 000 and $95, 000. Introducing an optimally designed turnover tax reduces the rate of informality of businesses by about 12 percentage points in the calibrated model. |
| Keywords: | Turnover Tax; Corporate Income Tax; Compliance Costs; Informality |
| Date: | 2023–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/267&r=iue |
| By: | Hirofumi Takikawa |
| Abstract: | Tax revenues, particularly in developing countries, play a crucial role in driving economic development, and formalizing the informal economy offers significant potential for raising revenues, given the large size of the informal economy and the limited role of personal income taxes in tax collection. However, effective formalization also requires sufficient redistributive incentives for a smooth transition to the formal economy. By addressing both formalization and redistribution simultaneously, this study examines the impact of formalizing the informal economy on an optimal tax schedule using an extended Mirrlees model, and identifies an optimal tax formula that incorporates formalization of the informal economy. Quantitative analysis shows that formalization increases tax revenue and income transfers when the tax schedule is optimized together with formalization. Conversely, these benefits diminish when the tax schedule remains unchanged and is not fine-tuned for formalization. This study improves our understanding of the informal economy and provides valuable insights into the implications for designing optimal tax policies with formalization. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:tcr:wpaper:e189&r=iue |
| By: | Luiz Brotherhood (Universitat de Barcelona & BEAT); Daniel Da Mata (Sao Paulo School of Economics-FGV); Nezih Guner (CEMFI, Centro de Estudios Monetarios y Financieros); Philipp Kircher (Cornell University); Cezar Santos (Inter-American Development Bank & CEPR) |
| Abstract: | This paper investigates informal employment in Brazil’s highly regulated labor market, focusing on the intensive margin of informality within formal firms. Using a comprehensive dataset of labor audits conducted from 1997 to 2012, we find that formal firms caught with informal workers face sustained slower growth. Informal workers are found across firms of all sizes, and their characteristics closely resemble those of formal employees. Building on these empirical findings, we develop a dynamic general equilibrium model where firms balance the flexibility of informality against potential costs. Our framework can be used to explore government policy implications and to examine the impact of audit strategies on informality, output, and workers’ welfare. |
| Keywords: | Informality, labor market regulation, firm dynamics, developing countries. |
| JEL: | H2 J1 J2 L1 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2023_2308&r=iue |
| By: | James Alm (Tulane University) |
| Abstract: | How can tax policy â and other government policies â serve as a tool to promote âdistributive tax justiceâ? In this paper, I briefly discuss the many tax reform proposals that have been proposed by many others for the specific case of the United States. I then focus on a set of specific U.S. tax reforms that are, I believe, both feasible and effective in achieving distributive tax justice. If implemented, these policies would increase the taxes paid by the rich, reduce tax evasion by the rich, and decrease the tax burdens by the gender, race, and ethnicity of taxpayers, all of which would lead to what I believe would be a fairer (and a more productive) tax system. I also argue that these policies apply in some form to most other countries around the world. My basic themes are that tax changes must be feasible and effective rather than simply aspirational but that even within this somewhat limiting framework much can be done. Specifically, these policies all work through existing taxes, they are are all administratively (if not necessarily politically) feasible and effective, none of these policies raise statutory marginal tax rates, these policies are all broadly consistent with the standard âBroad Base, Low Rateâ approach to tax reform, and variants of all of these policies apply world-wide. |
| Keywords: | Distributive tax justice, inequality, tax reform, tax compliance |
| JEL: | H2 H26 D91 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:2306&r=iue |