from shadow to green linking environmental fiscal reforms and the informal economy in the past few decades many papers have analysed in some depth different environmental tax reforms and the double dividend hypothesis i e the possibility of improving not only the environment but also the economy through the reduction of distortions in the tax system recently more stress has been placed on testing empirically what effects a reduction in labour taxes may have on unemployment when accompanied by a carbon or other environmental tax however such studies have not modelled the effects of the presence of a shadow economy even though informal markets account for a significant and growing part of gdp in many developed economies this paper analyses this link using an applied general equilibrium model for the case of spain which has one of the highest unemployment rates in the world and one of the biggest informal economies of any wealthy country we conclude that our analysis strengthens the case for an environmental tax reform in spain if revenues from a co2 tax are recycled via a labour tax reduction

the effect of taxes on labor supply in the underground economy this paper uses micro data from a randomized survey carried out in the metropolitan area of quebec city canada to analyze the decision to evade taxes and work in the underground economy the results indicate that taxes distort labor market activities away from the regular sector to the underground sector but the distortion is small for the average worker the distortion is large however for particular groups of the population such as welfare claimants copyright 1994 by american economic association

foreign corporations and the culture of transparency evidence from russian administrative data abstract firms from developed countries carry a culture of transparency in business transactions that is opposite to the culture of hiding and insider dealing in developing and transition economies we employ russian administrative data on reported earnings and market values of cars to measure wage misreporting for individual employees of domestic firms in moscow we show that closer ties to multinationals lead to improved transparency of wage reporting in private russian companies employees located closest to movers from multinationals in the job quality space experience the largest gains in transparency we find a robust correlation between wage misreporting and accounting fraud

regulatory discretion and the unofficial economy johnson kaufmann and shleifer 1997 find that the share of the unofficial economy in gdp is determined by the extent of control rights held by politicians and bureaucrats in post communist economies exploring in more detail the role of bribes and using a broader data set from the oecd latin america and transition economies we find that the unofficial economy accounts for a larger share of gdp when there is more corruption and when the rule of law is weaker while these findings are consistent with the earlier results for transition economies in the larger country sample we find it is not necessarily the case that more regulation or higher taxes directly increases the size of the unofficial economy the problem appears to be not regulation or taxation per se but whether the state administrative system can operate without corruption a high level of regulatory discretion helps create the potential for corruption and drive firms into the unofficial economy

dodging the grabbing hand the determinants of unofficial activity in 69 countries across 69 countries higher tax rates are associated with less unofficial activity as a percent of gdp but corruption is associated with more unofficial activity entrepreneurs go underground not to avoid official taxes but to reduce the burden of bureaucracy and corruption dodging the grabbing hand in this way reduces tax revenues as a percent of both official and total gdp as a result corrupt governments become small governments and only relatively uncorrupt governments can sustain high tax rates 2000 elsevier science s a all rights reserved

measuring the hidden economy implications for econometric modelling in this paper i support using econometric techniques to measure the size of the hidden underground economy because such information is important for the construction of certain economic models and for empirical policy analysis generally detailed information on the output of the hidden economy is unavailable even where careful measures of the underground economy have been constructed usually these data are available only periodically important exceptions are the classic results of tanzi 1983 for the united states and bhattacharyya s 1990 series for the united kingdom in the case of the new zealand economy a time series of data on the hidden economy has been generated recently giles 1997a this provides the unusual opportunity to undertake econometric modelling in a way which takes account of such activity formally moreover we can examine the policy implications arising from the linkages between hidden output and various measured economic aggregates this abstract was borrowed from another version of this item

has work sharing worked in germany industry by industry basis in an attempt to raise employment whether this work sharing works is theoretically ambiguous i exploit the cross industry variation in standard hours reductions to examine their impact on actual hours worked wages and employment analysis of industry level data suggests that work sharing may have reduced employment in the period 1984 1994 using individual data from the german socio economic panel i substantiate the union claim of full wage compensation the hourly wage rose enough to offset the decline in actual hours worked

do ethics matter tax compliance and morality in this article we argue that puzzle of tax compliance can be explained at least in part by recognizing the typically neglected role of ethics in individual behavior that is individuals do not always behave as the selfish rational self interested individuals portrayed in the standard neoclassical paradigm but rather are often motivated by many other factors that have as their main foundation some aspects of ethics we argue that it is not possible to understand fully an individual s compliance decisions without considering in some form these ethical dimensions specifically we argue here that there is much direct and indirect evidence that ethics differ across individuals and that these differences matter in significant ways for their compliance decisions we then put this in the larger context of the inability of the standard neoclassical paradigm to explain compliance of at least some individuals and we suggest several possible avenues by which theory can be expanded to incorporate ethics we conclude by arguing that a full house of compliance strategies is needed to combat tax evasion strategies that include the traditional enforcement paradigm suggested by and consistent with neoclassical theory a less traditional service paradigm that recognizes the important role of a kinder and gentler tax administration in encouraging compliance and importantly a new trust paradigm that is built on the foundation of ethics in which the tax administration must recognize that it can erode the ethics of taxpayers by its own decisions

the hidden economy as an unobserved variable abstract the technique of unobserved variables is used to estimate the relative size and development time of the hidden economy of oecd countries the burdens of taxation and regulations and the tax morality turn out to be statistically significant determinants at the end of the scandinavian and benc lux countries are expected to have a relatively large and japan and switzerland a relatively small hidden economy canada and the united states are rank in the middle the size of all hidden sectors is estimated to have increased in the period 1960 1973 relative to officially measured gnp

tax evasion the underground economy and financial development abstract we study the relationship between the underground economy and financial development in a model of tax evasion and bank intermediation agents with heterogeneous skills seek loans in order to undertake risky investment projects asymmetric information between borrowers and lenders implies a menu of loan contracts that induce self selection in a separating equilibrium faced with these contracts agents choose how much of their income to declare by trading off their incentives to offer collateral against their disincentives to comply with tax obligations the key implication of the analysis is that the marginal net benefit of income disclosure increases with the level of financial development thus in accordance with empirical observation we establish the result that the lower is the stage of such development the higher is the incidence of tax evasion and the greater is the size of the underground economy

might fundamental tax reform increase criminal activity fundamental tax reform replacing the income tax with a sales tax is commonly thought to reduce levels of criminal and other underground economic activity by implicitly taxing their returns this paper finds instead that the impact of tax reform depends on the relative labour intensity of production in the legitimate and illegitimate sectors of the economy in the likely event that illegitimate output is produced by using more labour intensive techniques than is legitimate output then replacing an income tax with a sales tax reduces the cost of criminal and other underground activity thereby stimulating its growth

on the economic rationale of estimating the hidden economy the estimation of the hidden economy may be considered as a human passion for knowing the unknown although a large literature on the hidden economy exists the subject is still controversial at a very basic level there are disagreements about 1 the definition of the hidden activities 2 the terms used to describe these activities 3 the estimation or measurement procedures and finally 4 on the use of these estimates in economic analysis in this paper we will only consider the issues related to estimation economic and econometric analysis of the hidden economy thus we implicitly accept the term hidden economy and explicitly state the definition before entering into the main discussions for a comprehensive study of past literature readers are referred to feige 1989 gaertner and wenig 1985 and tanzi 1982 and the large number of references in these books the use of the hidden economy estimates for economic and econometric analysis can be classified into three potentially distinct but interrelated categories a the derivation of economic theory and or its implication for the existing theories b the formulation of economic policies and c econometric modelling if we consider that the tax evaded income is the only constituent of the hidden economy then the issues are almost obvious for all three categories however as we will see later such a simple interpretation of the hidden economy estimates is generally not possible for example in this paper we define the hidden economy as the unrecorded national income the unrecorded national income is calculated as the difference between the potential national income for the given currency in circulation and the recorded national income this definition of the hidden economy suggests that in principle it is larger than the tax evaded income the empirical illustrations are taken from the studies conducted in the united kingdom and india where this is a workable definition however for many other countries such an approach is totally inadequate as a measure of unrecorded national income since the method of estimating the hidden economy is constrained by the structure of the economy in this paper we shall present a brief description of a general method of estimating the hidden economy and appraise the applicability and limitation of the method due to space constraint we shall discuss very briefly the importance of the hidden economy on economic theory and on the empirical

informal work networks we present a model of time allocation between formal and informal labour supply where workers learn of informal job opportunities from their peers in addition to formal income taxation and enforcement individuals labour supply decisions depend on the number of their peers with informal jobs and the strength of social ties workers allocate more time to informal activities when tax enforcement is lax and job information transmission is good more connected social networks e g wheel complete feature lower average income but higher average utility than poorly connected social networks e g star empty average income may be non monotonic in tax enforcement on presente un modele d allocation du temps entre l offre de travail formel et informel dans le cas ou les travailleurs apprennent l existence de possibilites de travail informel de leurs pairs en plus de dependre de l imposition des revenus formels et de la rigueur de ce processus les decisions des individus dans leur offre de travail dependent du nombre des pairs qui ont du travail informel et de la force des liens sociaux les travailleurs allouent plus de temps aux activites informelles quand l application de la loi fiscale est rel chee et que la transmission de l information a propos du travail informel est bonne des reseaux sociaux mieux connectes e g roue complet se traduisent par un revenu moyen plus bas mais par une utilite moyenne plus elevee que des reseaux sociaux plus pauvrement connectes e g etoile vide le revenu moyen peut avoir un lien non monotone a la nature de l application de la loi fiscale

quantifying the black economy measurement without theory yet again i shall argue that measurement without theory is a fair description of the published empirical work aimed at guestimating the size of the hidden or black economy i shall also argue that a mere guestimate of the overall size of the black economy is of limited value for the policy maker it is also important to know who is doing what where how and why then we can see what should and or can be done about legislating for or against the black economy in assessing the various attempts to measure the size of the black economy one should also be aware of a political dimension to some of this work perhaps a large and growing black economy is an indication that the economy is overtaxed and over regulated and a neo liberal adjustment is needed to free it up if a large part of the black economy is social security fraud then maybe unemployment is not really as bad as it looks clearly such political conclusions depended on having good theoretical as well as sound quantitative foundations and both these components were generally missing

the culture of corruption tax evasion and economic growth this study uses a dynamic general equilibrium model to quantify the effects of corruption and tax evasion on fiscal policy and economic growth the model is calibrated to match estimates of tax evasion in developing countries the calibrated model is able to generate reasonable predictions for net tax rates the corruption associated with public investment projects and the negative correlation between corruption and tax revenue the presence of corruption and evasion is shown to have significant but not large negative effects on economic growth the relatively moderate effects help explain the absence of a robust negative correlation between growth and corruption in cross country data the model also implies that cracking down on tax evasion before addressing corruption can be a bad idea and that higher wages for public officials can improve welfare jel h3 o4

smuggling illegal versus legal goods across the u s mexico border a structural equations model approach author affiliation andreas buehn faculty of business and economics technische universitaet dresden chair for economics esp monetary economics 01062 dresden germany e mail andreas buehn tu dresden de corresponding author stefan eichler faculty of business and economics technische universitaet dresden chair for economics esp monetary economics 01062 dresden germany e mail stefan eichler tu dresden de acknowledgment we thank gordon hanson for providing the data on mexican wages and u s border enforcement we are also grateful to alexander karmann sunshine moore the editor and two anonymous referees for their many useful comments and suggestions on this article we also benefited from comments of participants of the lunchtime seminar at technische universitaet dresden all remaining errors are the authors responsibility 1 introductionin this article we study smuggling across the u s mexico border from 1975 to 2004 we contribute to the literature in the following ways first we treat smuggling as an unobservable variable using a multiple indicators multiple causes mimic model we capture the latent nature of smuggling and identify its determinants and long run trends 1 secondly we argue that the analysis of smuggling has been incomplete so far existing studies merely analyze the causes of trade misinvoicing illegal trade or smuggling of legal goods which represent only a fraction of total illegal trade to improve the understanding of illegal trade we distinguish between smuggling illegal goods versus smuggling legal goods the types of smuggling differ with respect to the goods being smuggled the agents involved in smuggling the smuggling incentive and the intensity of law enforcement trade misinvoicing occurs when entrepreneurs misreport the value of legal exports or imports to evade tariffs and taxes and is commonly considered a peccadillo smugglers usually bribe officials or are fined a fee smuggling illegal freight such as illicit drugs and illegal immigrants however often involves dangerous criminals who commit serious offenses and who if caught face severe punishment as a result their incentive to smuggle is related to the intensity of law enforcement rather than tax or tariff evasion studying the u s mexican case is appropriate as most illegal drugs and immigrants enter the united states via the mexican border the large income disparity between the two nations may explain the high u s demand for illegal goods which relatively poor mexicans are willing to meet despite the risks involved we examine whether the clinton and bush administrations succeeded in reducing smuggling across the border through intensified border enforcement using a simple microeconomic framework we determine which microeconomic incentives affect the two types of smuggling the hypotheses are then tested in a mimic model that studies the impact of observed causes the microeconomic incentives to smuggle on the latent phenomenon smuggling as indicated by observable macroeconomic variables applying the benchmarking procedure promoted by dell anno and schneider 2006 and dell anno 2007 we calculate a time series for each type of smuggling we find that smuggling in illegal goods from mexico to the united states decreases when mexican labor market conditions improve and u s border enforcement is intensified the mexican recessions in 1982 1983 and 1995 led to large temporary increases in smuggling to 113 billion and 87 billion respectively smuggling in illegal goods decreased overall however from 116 billion in 1984 to 27 billion in 2004 this reduction can be attributed to stricter u s border enforcement and better mexican job prospects smuggling legal goods is driven by real exchange rates and tariff and tax evasion export misinvoicing fluctuated between underinvoicing values of 0

informal sector regulatory compliance and leakage abstract the paper models a vertically related formal and informal sector and endogenizes the size and regulatory compliance status of the informal sector when the formal sector can circumvent costly regulations by outsourcing polluting intermediate goods from the informal sector stricter regulations increase when the composition effect of regulation dominates its scale effect or decrease total pollution and may even have a non monotonic impact we identify conditions under which a partially compliant informal sector acts as a source of leakage and examine implications for optimal enforcement policy further we show that price discrimination by the formal sector when it purchases the intermediate goods from the informal sector can worsen regulatory compliance by the informal sector and lead to more pollution

the underground economies tax evasion and information distortion list of contributors preface introduction edgar l feige part i the meaning measurement and policy implications of the underground economies 1 the meaning and measurement of the underground economy edgar l feige 2 information distortions in social systems the underground economy and other observer subject policymaker feedbacks robert r alford and edgar l feige 3 policy illusion macroeconomic instability and the unrecorded economy robert t mcgee and edgar l feige 4 how large or small should the underground economy be bruno frey part ii the underground economy in western developed nations measurement in different laboratories 5 monetary perspective on underground economic activity in the united states richard d porter and amanda s bayer 6 the unrecorded economy and the national income accounts in the netherlands a sensitivity analysis g a a m broesterhuizen 7 assessing the underground economy in the united kingdom michael o higgins 8 the underground economy in the federal republic of germany a preliminary assessment enno langfeldt 9 the underground economy in sweden ingemar hansson 10 the irregular economy of italy a survey of contributions bruno contini 11 the hidden economy in norway with special emphasis on the hidden labor market arne jon isachsen and steiner strom 12 canada s underground economy rolf mirus and roger s smith 13 the underground economy in france philippe barthelemy part iii the underground economy under central planning 14 the soviet second economy in a political and legal perspective f j m feldbrugge 15 second economy and socialism the hungarian experience istvan r gabor bibliography

the informal sector in developed and less developed countries a literature survey the main goal of this study is two fold 1 to provide ageneral overview of the contributions to the literature on theinformal sector with a special focus on the public choiceapproach and 2 to compare these contributions across twoinstitutionally different types of countries developed andless developed developing and transition countries thepaper focuses on the criteria used to define the informalsector the relationship between the formal and informaleconomy tax evasion and public choice analysis it isstressed throughout this paper that the distinction betweenthe two types of countries is of key importance

blessing or curse foreign and underground demand for euro notes public finance solutions to the european unemployment problem developing countries may hold as much as 25 30 of the 1 3 trillion oecd currency supply although dollar holdings appear to exceed dm holdings by a factor of four the advent of the euro may change this balance indeed by issuing large denomination notes of 100 200 and 500 the european central bank appears to be well poised to challenge the dominance of the ubiquitous us 100 note however large denomination notes are also extremely popular in the oecd underground economy which appears to hold at least 50 of the currency supply as a result the seigniorage revenues obtained by issuing large denomination notes may be an accounting illusion substantially or fully offset by losses due to increased tax evasion hence the new european central bank may wish to consider policies that discourage underground use of currency even at the expense of losing out on foreign demand kenneth rogoff

informal firms in developing countries entrepreneurial stepping stone or consolation prize the potential dynamic benefits of a firm having the option to adopt informal status are analysed informality may be a stepping stone without which formality may never be achieved this result is obtained for a broad range of realistic parameter values suggesting a potential dynamic case for government support of informal firms informality may alternatively play a converse role as a consolation prize with a firm only entering an industry formally because it recognizes that if profitability is disappointing it can switch to informality however this result is obtained for a range of parameter values so narrow as to be of no practical significance

corruption centralization and the shadow economy in their pioneering work on corruption shleifer and vishny 1993 find that a centralized bureaucracy results in lower bribes our paper extends the analysis to economies with formal and informal sectors when corrupt officials operate in both sectors bureaucratic centralization is beneficial when confined to the formal sector however we show that crosssector centralization can result in higher bribes and lower welfare furthermore contrary to choi and thum 2005 we demonstrate that depending on the organization of the bureaucracy and the productivity of the informal sector the presence of the shadow economy may have adverse effects on corruption and welfare

coming out of the shadows estimating the impact of bureaucracy simplification and tax cut on formality in brazilian microenterprises abstract this paper evaluates the impact of a program of bureaucracy simplification and tax reduction on formality among brazilian microenterprises the simples program we document an increase of 13 percentage points in formal licensing among retail firms created after the program when compared to firms in ineligible sectors the impact on retailers is robust to a series of tests we find no impact on construction transportation services and manufacturing sectors

the effects of irregular markets on macroeconomic policy some estimates for belgium abstract the paper aims at evaluating the efficiency of traditional keynesian demand or neo classical income policies in the presence of an irregular sector the analysis is applied to the belgian economy for which it is shown that the objectives of increasing output and employment and reducing the importance of the irregular economy will often lead to conflicting policy prescriptions in addition keynesian multipliers may be lowered by as much as 40 though the irregular market only represents some 10 to 15 of total activity

informal self employment and macroeconomic fluctuations article i nfo article history informal self employment is a major source of employment in developing countries its cyclical behavior is important to our understanding of the functioning of ldc labor markets but turns out to be surprisingly complex we develop a flexible model with two sectors a formal salaried tradable sector that may be affected by wage rigidities and an informal non tradable self employment sector faced with liquidity constraints to entry this labor market is then embedded in a standard small economy macro model we show that different types of shocks interact with different institutional contexts to produce distinct patterns of comovement between key variables of the model relative salaried self employed incomes relative salaried self employed sector sizes and the real exchange rate model predictions are then tested empirically for argentina brazil colombia and mexico we confirm episodes where the expansion of informal self employment is consistent with the traditional segmentation views of informality however we also identify episodes where informal self employment behaves pro cyclically here informality is driven by relative demand or productivity shocks to the non tradable sector

unemployment and international shadow economy gender differences abstractadding to the body of research on cross country determinants of the informal economy this article studies how unemployment differences across gender drive the propensities to work in the informal sector results accounting for possible simultaneity between unemployment and the shadow economy show that unemployed males rather than unemployed females were more likely to operate underground these findings about greater male propensities are generally robust to alternative considerations

releasing constraints to growth or pushing on a string policies and performance of mexican micro firms abstract using firm level data from mexico this paper investigates the firm characteristics associated with participation in credit markets access to training tax payments and membership in business associations we find that firms which participate in these institutions exhibit significantly higher profits moreover firms that borrow from formal or informal sources and those that pay taxes are significantly more likely to stay in business but firms that received credit exhibit lower rates of income growth these results persist when firm characteristics that are arguably correlated with unobserved entrepreneurial ability are controlled for our findings suggest that the significant within country differences in firm productivity observed in developing economies are due in part to market and government failures that limit the ability of micro firms to reach their optimal sizes

modelling energy systems for developing countries abstract developing countries energy use is rapidly increasing which affects global climate change and global and regional energy settings energy models are helpful for exploring the future of developing and industrialised countries however energy systems of developing countries differ from those of industrialised countries which has consequences for energy modelling new requirements need to be met by present day energy models to adequately explore the future of developing countries energy systems this paper aims to assess if the main characteristics of developing countries are adequately incorporated in present day energy models we first discuss these main characteristics focusing particularly on developing asia and then present a model comparison of 12 selected energy models to test their suitability for developing countries we conclude that many models are biased towards industrialised countries neglecting main characteristics of developing countries e g the informal economy supply shortages poor performance of the power sector structural economic change electrification traditional bio fuels urban rural divide to more adequately address the energy systems of developing countries energy models have to be adjusted and new models have to be built we therefore indicate how to improve energy models for increasing their suitability for developing countries and give advice on modelling techniques and data requirements

the underground economy in the late 1990s evading taxes or evading competition summary this paper studies the driving forces behind the considerable expansion of the underground economy during the late 1990s i propose a novel explanation for this phenomenon the sharp increase in market competition worldwide which reduces prices and profits and drives firms into the shadow economy empirical evidence from a panel covering 45 countries from 1995 to 2000 shows that increased competition is indeed correlated with an expansion of the underground economy the effect is strongest in low tax high corruption countries that do not provide the public services which make it worthwhile for firms to remain official despite growing competitive pressure

the canadian underground and measured economies granger causality results using new time series data for the size of the canadian underground economy the relationship between unreported and measured gdp in that country is examined granger causality tests are conducted with a proper allowance for the non stationarity of the data it is found that there is clear evidence of such causality from measured gdp to hidden output but only very mild evidence of granger causality in the reverse direction this result supports similar evidence for new zealand reported by the first author and has several interesting policy implications

opening the pandora s box trade openness and informal sector growth this article constructs a labour transition model combining the features of job loss and job creation in the formal sector of an economy the theoretical model examines the impact of trade liberalization on net job transition from formal to informal sector in the light of our model we establish certain pre conditions based on simulations under which trade liberalization is accompanied by rising informal sector the model outcome conforms to the empirical evidence of rising informality with openness which we find in 18 central eastern european and former soviet union countries

approaches for estimating noncompliance examples from federal taxation in the united states crime and underground economic activity are a fact of life around the world most societies attempt to control these activities through the expenditure of resources on monitoring prosecution punishment and educational programmes gathering statistics about who is engaging in illegal or underground activity the frequencies with which various crimes or underground transactions are occurring and the severity or magnitude of these acts is crucial for making good decisions regarding our allocation of resources in this area unfortunately in general it is very difficult to obtain accurate information about these issues this is partly because the individuals engaged in such activities wish not to be identified and often take actions to avoid detection and partly because by their very nature the activities tend not to generate economic accounting legal demographic or other cultural records the fact that it is difficult to obtain accurate information about the activities however does not in any way imply that we should not make a concerted effort to try to obtain the best information we can i believe the cost associated with attempting to determine the extent and nature of these activities is in most circumstances well below the expected benefit which includes the likelihood of improved decisionmaking by relevant government personnel and the general public as a result i also believe the debate about developing estimates of illegal or underground economic activity should primarily focus on practical issues related to how best to go about developing estimates that are as reliable as possible in this short article i shall discuss the measurement of noncompliance with laws and regulations my particular area of expertise and shall not discuss the measurement of other kinds of hidden economic behaviours such as informal contracting unmeasured home production and grey market activities in particular i shall discuss three approaches for estimating the aggregate amount of noncompliance with respect to a specific law or regulation i intensive data collection for a focused subsample of the population ii detection controlled estimation and iii the comparision of estimates generated by distinct datasets and models for each i shall describe in general terms what the approach is and how it is implemented review limitations of the approach and present an example of the application of the approach to the measurement of tax noncompliance in the united states my discussion shall necessarily be short and i refer the interested reader to a variety of original research publications for more details especially about the specific examples

corruption top down or bottom up this article studies the impact of corruption on an economy with a hierarchical government in particular we study whether centralizing corruption within the higher level of government increases or decreases the total amount of corruption we show that when the after tax relative profitability of the formal sector as compared to that of the informal sector is high enough adding a layer of government increases the total amount of corruption by contrast for high enough public wages and or an efficient monitoring technology of the bureaucratic system centralization of corruption at the top of the government hierarchy redistributes bribe income from the lower level to the upper level in the process total corruption is reduced and the formal sector of the economy expands

sme credit constraints in asia s rising economic star fresh empirical evidence from vietnam this study provides a fresh look at the sme sector s economic backbone vis a vis credit constraint dichotomy in vietnam asia s rising economic star the study uses data from the survey of manufactu

tax evasion in transition outcome of an institutional clash testing feige s conjecture in albania a field survey of households was conducted in tirana albania in 2000 a response rate of 89 3 yielded 1 340 valid questionnaires allowing me to test feige s in nelson j m tilley c walker l eds transforming post communist political economics national academy press washington dc p 21 conjecture that more tax evasion will be observed when formal and informal institutions clash respondents attitudes towards formal and informal institutions were obtained by applying factor analysis to their responses to a series of attitudinal questions the theoretical importance of the interaction between formal and informal institutions in determining tax evasion finds empirical support in the data

local autonomy tax morale and the shadow economy policymakers often propose strict enforcement strategies to fight the shadow economy and to increase tax morale however there is an alternative bottom up approach that decentralises political power to those who are close to the problems this paper analyses the relationship with local autonomy we use data on tax morale at the individual level and macro data on the size of the shadow economy to analyse the relevance of local autonomy and compliance in switzerland the findings suggest that there is a positive negative relationship between local autonomy and tax morale size of the shadow economy

how big is the shadow economy a re analysis of the unobserved variable approach of b s frey and h weck hannemann abstract in a widely quoted study b s frey and h weck hannemann estimated the size and the development of the shadow economy in 17 countries by means of the latent variable approach a re analysis of the data shows that the results of frey and weck hannemann s model are extremely unstable and cannot be regarded as reliable statements about the shadow economy of these 17 countries even minor variations in the number of countries included in the analyses in the period under investigation or in the index which is defined lead to a pronounced instability a critical look at the observational variables used in the model lead to the conclusion that the authors cannot even be sure that what they have investigated is indeed the shadow economy the latent variable could equally well be interpreted in other ways it could be for instance that they have measured the development of the welfare state

informality over the life cycle abstract in developing countries informality is mainly concentrated among younger and older workers and low skilled workers in this study we propose a dual labor market theory that highlights how frictions and taxation in the formal sector and educational choices interact to shape the informality rate over the life cycle we develop a life cycle model with search frictions skill heterogeneities and endogenous educational choices we carry out a numerical analysis and show that our model reproduces remarkably well the life cycle patterns of informality non employment and formal employment in argentina we analyze several public policies and show that an educational grant reduces both informality and non employment and may be fully financed by the extra tax revenues generated by the increase in formal employment and wages lowering taxes may achieve similar results but is detrimental to the government budget despite increasing the base on which they are levied

financial institutions and markets across countries and over time the updated financial development and structure database this article introduces the updated and expanded version of the financial development and structure database the database includes indicators on the size efficiency and stability of banks nonbank financial institutions and equity and bond markets over 1960 2007 it also contains indicators of financial globalization

estimating the size of the danish shadow economy using the currency demand approach an attempt the currency demand approach provides some insight into the size and development of the shadow economy in denmark currency demand is statistically affected by tax rates the difference in currency demand is calculated by comparing the actual tax burden over time to the lowest tax burden in the period 1952 82 the shadow economy grew steadily to 10 per cent of gnp in 1977 and then fluctuated between 7 10 per cent of gnp for the period 1978 82 the calculated size fits nicely with the results obtained using the same

start up costs limited enforcement and the hidden economy abstract this paper examines how much of the difference in the size of the informal sector and in per capita income across countries can be accounted by regulation costs and enforcement of financial contracts it constructs and solves numerically a general equilibrium model with credit constrained heterogenous agents occupational choices over formal and informal businesses financial frictions and a government sector which imposes taxes and regulations on formal firms the benefit from formalization is better access to outside finance the quantitative exercises suggest that i regulation costs and not the level of enforcement account for differences in the size of the informal sector between united states and mediterranean europe ii for a developing country like peru however contract enforcement and regulation costs are equally important in accounting for the size of the informal sector and iii regulation costs and contract enforcement do not account for most of the income differences observed among countries

shadow economies size causes and consequences using various methods the size of the shadow economy in 76 developing transition and oecd countries is estimated average size varies from 12 percent of gdp for oecd countries to 23 percent for transition countries and 39 percent for developing countries increasing taxation and social security contributions combined with rising state regulations are driving forces for the increase of the shadow economy especially in oecd countries according to some findings corruption has a positive impact on the size of the shadow economy and a growing shadow economy has a negative effect on official gdp growth

review of de soto s the mystery of capital in the mystery of capital hernando de soto promotes his explanation of why formal capital markets function poorly in developing countries de soto argues that much of the population of developing countries lacks access to credit not because they lack assets but because ownership of their property is secured informally which prevents the use of property as collateral the inability to convert assets into capital keeps the developing world from benefiting from capitalism

the shadow economy as an equilibrium outcome abstract we construct a dynamic general equilibrium model of tax evasion where agents choose to report some of their income unreported income requires using a payment method that avoids recordkeeping in some markets cash trade using cash to avoid taxes is the shadow economy in our model we then calibrate our model using money interest rate and gdp data to back out the size of the shadow economy for a sample of countries and compare our measures to traditional reduced form estimates

corruption and development a review of issues in this paper we start with a discussion of some of the different denotations of the problem of corruption we then consider the ways in which the damaging consequences of corruption operate in a developing economy while not ignoring its possible redeeming features in some cases we pursue the question of why corruption is perceptibly so different in different societies and also persistent finally we examine the feasible policy issues that arise in this context

labor market institutions taxation and the underground economy abstract the paper aims at qualifying the links between labor market institutions taxation tax monitoring and underground economic activity the proposed model is a continuous time matching model with one commodity roduced either overground or underground underground economic activity arises because of partial compliance with regulations and tax contributions imposed by the government vacancies and workers search are directed at a specific labor market workers are heterogenous in the subjective cost they face when operating in the irregular sector analytical and numerical investigations suggest that interactions between regular and irregular activities can affect standard results of policy interventions in that respect the paper supports the view that policies aiming at increasing individuals benefits of participating in the regular sector are more desirable than a deterrence policy

contractual dualism market power and informality we develop a search theoretic model of contractual dualism in formal and informal labour markets the model i provides the micro underpinnings for endogenous determination of employer market power in the formal and informal sectors ii offers a unified and coherent set up whereby a host of salient features of developing country labour markets can be explained together and iii places for the first time the stiglerian prescription of the optimal unemployment minimising minimum wage in the broader context of labour markets where formal job creation is costly where employer market power is endogenous and where formal employment informal employment and unemployment coexist

estimating the second economy in tanzania abstract the official national accounts of tanzania suffer from two serious weaknesses incomplete coverage as well as inaccurate estimates of the activities covered this arises because many of the activities especially those in the informal sector are either misreported or underrecorded often however the required information is deliberately concealed from public authorities either because the agents are involved in illegal black market activities or where such parallel market activities are legal there is a deliberate intention to evade government controls the misstatement and omission of these second economy activities from official statistics imply that macroeconomic measures are not robust enough for meaningful analysis development planning policy and program formulation this paper attempts to estimate the magnitude of and changes in the second economy in tanzania to establish the extent to which official statistics misstate actual production of goods and services

uses and abuses of estimates of the underground economy ered valuable by at least a part of society narcotics production and distribution prostitution gambling these activities can be large in some countries and should be counted in the national accounts of all countries although they rarely are their omission affects the comparability of data across countries the incomes generated by illegal activities are rarely taxed many other activities such as those associated with the subsistence or informal sectors are estimated rather than measured and are generally not taxed because of the low value they generate to those who engage in them in conclusion there are many reasons beside the ones discussed in this paper why the measurements of national output may not be complete about two decades ago a few economists became convinced that many normal economic activities that should be measured and taxed were taking place underground or in the shadow thus presumably escaping the attention of the statistical offices of the tax authorities and more generally of the government regulators some of these economists also claimed that like alice in wonderland these hidden activities were growing in a ridiculous fashion see gutmann 1977 and feige 1979 by the late 1970s the role of government had grown enormously so that the level of taxation and the tax rates had risen sharply and regulations had proliferated in many countries see tanzi and schuknecht 1997 these developments had created strong incentives for individuals and enterprises to go underground to avoid taxes and regulatory restrictions thus a good case could be made that what came to be called the underground economy was a phenomenon to worry about newspaper articles were ready to accept the

market consumption and hidden consumption a test for substitutability in this paper an empirical analysis is performed on the relationship between private consumption and underground economy for the italian case it is found that private market consumption and underground or hidden consumption may be defined as complementary goods an increase in underground consumption tends to increase family market consumption and increase its marginal utility an implication of this result is that the nonmarket sector does not offer hedging opportunities to the consumer worker as stressed by busato and chiarini s 2004 artificial economy moreover wealth effects associated with a change in underground consumption are negative a statistical model confirms this structural interpretation

the power to tax analytical foundations of a fiscal constitution preface 1 taxation in constitutional perspective 2 natural government a model of leviathan 3 constraints on base and rate structure 4 the taxation of commodities 5 taxation through time income taxes capital taxes and public debt 6 money creation and taxation 7 the disposition of public revenues 8 the domain of politics 9 open economy federalism and taxing authority 10 toward authentic tax reform prospects and prescriptions epilogue notes selected bibliography index

unemployment and the shadow economy abstractcurrent research links the shadow economy se and the unemployment rate either indirectly or by means of a preliminary estimate this article establishes and empirically implements a methodology for estimating the size of the se as a direct function of the tax and unemployment rates this link is found to be extremely relevant in countries with high unemployment rates such as greece and spain and less relevant in countries with moderate unemployment rates such as germany and italy unemployment s contribution to the se is shown to be significant especially in the years following the economic downturn of 2008 the calculation of the variance and distribution of these estimates is another significant contribution the common criticism that se estimates are unreliable is addressed by calculating the variance and the distribution of the estimates and the large size of the se in greece and spain is once again confirmed

cut throat fringe competition in an emerging country market tax evasion or the absence of market power brazil s established soft drink firms recently lost ground to multiple low price entrants with small scale operations and minimal advertising while incumbents attributed such undercutting to entrants lower costs from non compliance with the law generics counterargued that incumbents high prices stemmed from unilateral market power rather than cost heterogeneity by estimating a structural model i can single handedly explain established brands high prices through low equilibrium price elasticities of demand tax evasion in the fringe while plausible appears to be offset by higher procurement costs or less efficient scale more generally a competitive informal sector can alleviate the allocative distortions in certain concentrated industries

can africa compete with china in manufacturing the role of relative unit labor costs in this paper examine sub saharan africa s ssa bilateral trade and cost competitiveness with china we review patterns of bilateral trade between ssa and china showing an extraordinary imbalance in the structure of trade in that china overwhelmingly exports manufactured products to ssa and almost exclusively imports primary products in return our principal means of assessing the competitiveness of ssa s manufacturing sector vis a vis china are measures of relative unit labor costs rulc we find that african rulc levels have generally been very high relative to china but declined over the 2000s as china s wages have risen faster than chinese productivity while the reverse is true for the ssa countries in our sample nevertheless rulc vis a vis china remained elevated for many ssa countries as of 2010 generally high rulc along with weaknesses in the business climate suggest that most ssa countries are unlikely to be competitive in labor intensive manufacturing any time soon

skyscraper height and the business cycle separating myth from reality this article is the first to rigorously test how skyscraper height and output co move because builders can use their buildings for nonrational or nonpecuniary gains it is widely believed that height competition occurs near the business cycle peaks this would suggest that extreme building height is a leading indicator of gdp since the tallest buildings are likely to be completed at or near the peak of a cycle to test these claims first we look at both the announcement and the completion dates for record breaking buildings and find there is very little correlation with the business cycle second cointegration and granger causality tests show that while height and output are cointegrated height does not granger cause output these results are robust for the united states canada china and hong kong

production uncertainty and the market equilibrium of the competitive firm abstract assumptions outputs are planned ex ante by risk neutral firms actual outputs are stochastic with variance function of planned output production costs are function of planned outputs while the market linear demand function is stable if individual outputs as positively correlated expected profit is decreased by the negative covariance between output and price the firms and market equilibria are analyzed in the short run and the long run with varying number of firms they are compared with oi s and tisdell s uncertain demand models

business organisations party systems and tax composition in developing countries a comparison between colombia and peru abstractthis paper explores the relationship between socio political institutions and tax composition in developing countries it argues that strong business organisations and stable political party systems reduce the uncertainty of fiscal contracts for economic elites the decrease in uncertainty leads elites to accept a larger share of the tax burden which governments then collect using progressive tax types more intensively to illustrate this claim i provide evidence from a comparative analysis of the peruvian and the colombian tax history between 1970 and 2010

do urbanization and industrialization affect energy intensity in developing countries abstract against a backdrop of concerns about climate change peak oil and energy security issues reducing energy intensity is often advocated as a way to at least partially mitigate these impacts this study uses recently developed heterogeneous panel regression techniques like mean group estimators and common correlated effects estimators to model the impact that income urbanization and industrialization has on energy intensity for a panel of 76 developing countries in the long run a 1 increase in income reduces energy intensity by 0 45 to 0 35 long run industrialization elasticities are in the range 0 07 to 0 12 the impact of urbanization on energy intensity is mixed in specifications where the estimated coefficient on urbanization is statistically significant it is slightly larger than unity the implications of these results for energy policy are discussed

modeling informality formally households and firms i introduction recent estimates indicate that around 10 of gross domestic product gdp in the united states is produced by individuals or firms that evade taxes schneider and enste 2000 in latin america approximately 50 of all salaried employees work informally an important question is therefore what are the determinants of informality unfortunately three decades of research have not yet yielded a consensus opinion on this point the traditional explanation initiated with the work of lewis 1954 assumes the existence of segmented labor markets in which some workers do not have access to jobs in the regulated formal sector these workers are forced to accept lower paying informal sector jobs that usually involve inferior working conditions while this view has become prevalent in the development literature direct empirical tests of the premise that informal workers would expect higher wages in the formal sector yield mixed results for instance magnac 1991 maloney 2004 and pratap and quintin 2004 do not find compelling evidence of segmentation between the formal and the informal sectors using data from colombia mexico and argentina respectively it is nonetheless certainly plausible that the presence of unions might segment the labor market layard et al 1991 however even if we believe that unionization has been an important factor in determining labor market segmentation in the past the pronounced decline of unionization throughout latin america over the last two decades seems to be a less satisfactory explanation of the phenomenon at the present time especially since informality increased in most countries in latin america during the same period gasparini and tornarolli 2006 another approach emphasizes the role of labor market regulation and taxation as the main cause of informality a pioneering study by de soto 1989 describes how informal workers develop their own laws and institutions to make up for the shortcomings of the official legal system it is certainly true that the size of the shadow economy is affected by the burden of taxes and social security contributions as well as by the many other regulations governing the official economy the problem with adopting this explanation of informality unreservedly however is that it overlooks the fact that workers have nonpecuniary preferences for the sector they work for and these preferences play a role in determining the equilibrium level of formality of an economy in particular workers in the informal sector are not eligible for socially mandated benefits three stylized facts characterize informality 1 small firms tend to operate informally while large firms tend to operate formally 2 unskilled workers tend to be informal while skilled ones have formal jobs 3 ceteris paribus secondary workers a worker other than the household head are less likely to operate formally than primary workers in this paper we present a model of an economy in which the sizes and wages of the formal and informal sectors are endogenously determined that accounts for these three facts our model entails a continuum of types on both sides of the labor market i e firms and workers firms choose whether to operate formally or informally and workers choose in what sector they work in equilibrium managerial talent determines size dualism at the firm level and human capital is the factor that determines whether workers are employed in the formal or informal sector in our model both heterogeneous firms and workers have preferences over the sectors they operate and choose optimally whether to function formally or informally by contrast a prominent feature of the preexisting literature is the idea that workers decisions play no role in determining the equilibrium of the economy thus our model is the first one in which policies that affect workers preferences as well of course as firm preferences over the formal or the informal sector such as pension plans public health issues and unemployment and any social benefits will affect the sizes and wages of the formal and the informal sectors

how does corruption affect public debt an empirical analysis summary this paper investigates the relationship between corruption the shadow economy and public debt it additionally examines whether the shadow economy increases the adverse effects of corruption on public debt the model is empirically tested for 126 countries over 1996 2012 using ordinary least squares ols fixed effects system generalized method of moments gmm and instrumental variable estimation and two measures of corruption the transparency international corruption perceptions index and the kaufmann et al corruption index results confirm that increased corruption and a larger shadow economy lead to an increase in public debt results additionally indicate that the shadow economy magnifies the effect of corruption on public debt suggesting that they act as complements results also suggest that a larger shadow economy reduces tax revenues and thus increases public debt similarly higher government expenditure enhances the effects of corruption on government debt hence reducing corruption should be a primary policy goal of governments given the complementarity detected between corruption and the shadow economy reducing corruption would also lead to a fall in the size of the shadow economy and public debt reducing corruption will also minimize the adverse effects of corruption on government debt through government expenditure

the influence of direct democracy on the shadow economy we analyze both theoretically and empirically the influence of direct democratic institutions on the size and development of shadow economies our model suggests that as the extent of direct democracy increases implemented fiscal policies more nearly reflect the preferences of citizens and so reduce their incentives to operate in the informal sector this theory implies a negative relationship between the extent of direct democracy and the size of the country s shadow economy we also theorize that direct democracy has a greater effect in reducing the informal sector when the former is at low or intermediate values and when the electoral system is characterized by a larger district magnitude an empirical investigation of a sample of 57 democracies confirms our model s predictions

the not so dark side of trust does trust increase the size of the shadow economy this paper reports a negative relationship between the size of the shadow economy and generalized trust in a sample of countries both developed and developing that relationship is robust to controlling for a large set of economic policy and institutional variables to changing the estimate of the shadow economy and the estimation period and to controlling for endogeneity it is independent from trust in institutions and from income inequality and is mainly present in the sample of developing countries those findings suggest that the tax compliance effect of trust dominates its role as a substitute for the formal legal system

informality in the process of development and growth informality is a term used to describe the collection of firms workers and activities that operate outside the legal and regulatory systems it is widespread in the majority of developing countries in a typical developing economy the informal sector produces about 35 per cent of gdp and employs 70 per cent of the labour force this paper studies informality in the context of economic development by presenting a model and projections that link informality regulations migration and economic growth this analytical framework highlights the trade offs between formality and informality the relationship between the different types of informality and the connection between them and the forces of labour capital and productivity growth the paper models the behaviour of the informal sector based on the following fundamental asymmetry formal firms confront higher labour costs while informal firms face higher capital costs and lower productivity using mandated minimum wages as the policy induced distortion the model first studies the static allocation of formal and informal capital and labour in a modern economy second it opens the possibility of labour migration from a rudimentary economy with ample supply of labour e g rural areas or less advanced neighbouring countries third the model analyses the dynamic behaviour of the formal and informal sectors considering how they affect and are affected by economic growth and labour migration then the paper presents projections for the size of labour informality in the modern and rudimentary economies in the next two decades for a large group of countries representing all regions of the world the projections are based on the calibration and simulation of the model and serve to discuss its usefulness and limitations

does variability in crimes affect other crimes the case of international corruption and shadow economy abstractusing data on more than 125 countries this article attempts to add to the research linking corruption and the shadow economy by examining the effect of variability uncertainty in one whi

the excess burden of tax evasion an experimental detection concealment contest abstract tax evasion may cause social welfare losses due to the incentives of taxpayers to invest in the concealment and of tax authorities to invest in the detection of tax evasion reducing the investment of both parties at the same time would then lead to a pareto improvement given that concealment and detection costs are hardly measurable in reality we show in a controlled laboratory experiment that the welfare losses from a concealment detection contest depend positively on the prevailing tax rate but not on the penalty which is imposed in case of detected tax evasion hence policy makers who are concerned about socially inefficient concealment and enforcement costs should focus on tax rates rather than penalty rates

heterogeneous firms and the impact of government policy on welfare and informality we analyze the formality benefits through productivity enhancing public goods we document that benefits from formality matter for firms optimal decisions there is a disconnect between the objectives of maximizing formality versus welfare this disconnect is mitigated under higher formality benefits

tax rates governance and the informal economy in high income countries i introduction informal economic activity was long thought to be a feature of developing countries formalization of business was supposed to go hand in hand with economic development however even among high income countries a large part of economic activity is informal according to schneider 2002 16 7 of gross domestic product gdp in high income oecd organisation for economic cooperation and development countries was informally produced in 2001 2002 the author defines the informal economy as all economic activities which would generally be taxable were they reported to the state tax authorities p 4 in this sense both the informal economy and tax evasion are measures of the same phenomenon while tax evasion refers to the amount of forgone tax revenues the term informal economy encompasses the amount of production that escapes taxation 1 schneider s 2002 estimates of the informal economy of 21 high income oecd countries are reproduced in figure 1 2 these numbers have been obtained by the so called currency demand approach which estimates currency demand as a function of interest rate per capita income proportion of wages and salaries in aggregate output and tax rates excess demand of currency caused by a rise in tax rates is attributed to an increase in the informal economy 3 thus while the currency demand approach establishes a relationship between increasing tax rates and increasing informality within a country it does not imply any built in relationship between tax rates and the size of the informal economy across countries figure 1 omitted numbers in figure 1 show that there are large differences in the size of the informal economy even across high income countries in greece the informal economy amounted to 28 5 of gdp while in the united states the estimate was 8 7 4 put differently the production of legal final goods and services worth 892 billion about 3 090 per capita went untaxed in the united states while in greece 49 billion about 4 380 per capita escaped taxation given these large differences in the size of the informal economy even across high income countries the following two questions arise what are the driving forces behind informal economic activity in high income countries and to what extent can differences in these driving forces account for cross country differences in informality a paper by davis and henrekson 2005 suggests a natural answer to the first question across 14 high income oecd countries the authors find a positive and significant relationship between tax rates and the size of the informal economy figure 2 replicates their results and shows the relationship between tax rates on income and consumption and social security contributions and the size of the informal economy however despite a positive relationship between tax rates and informality countries with equally high tax rates have strikingly different estimates of their informal economies in 1995 1996 spain and the netherlands had similar total tax rates on income and consumption and social security contributions of around 67 the netherlands informal economy was estimated to amount to 13 7 of gdp while the estimate for spain was 22 4 apart from tax rates additional forces seem to drive informality in high income countries low institutional quality and corruption are possible suspects their close relationship to the size of the informal economy has been highlighted by various empirical studies friedman et al 2000 chong and gradstein 2007 and johnson kaufmann and zoido lobaton 1998 all find a positive relationship between low institutional quality a large regulatory burden corruption and the size of the informal economy the relationship between institutional quality and informality also holds across the sample of 21 high income countries figure 3 shows the negative relationship between the size of the informal economy and the commonly used world bank governance indicators on government effectiveness regulatory quality rule of law and control of corruption

social capital one or many definition and measurement three families of social capital concepts are discussed fa1 trust fa2 ease of cooperation and fa3 network in the language of game theory social capital is the excess propensity to play cooperative solutions in prisoners dilemma games the three families lead to different definitions and thus to different measurement methods some measures are theory near while others are easy to use proxies it is shown that all definitions and measures are related the social capital dream is that all definitions try to catch aspects of the same phenomenon so that all measures tap the same latent variable it is discussed whether this dream is likely to come true

tax evasion and the demand for currency in norway and sweden is there a hidden relationship variables associated with the level of hidden economic activity are examined in terms of their effects on the demand for currency in norway and sweden aggregate time series of marginal tax rates are compiled for this purpose no such effects are evident for norway while in the case of sweden the demand for currency was found to be significantly related to marginal tax rates these estimates are then used as a basis for deriving an estimate of the size of the hidden economy in sweden an analysis of the assumptions underlying this procedure shows that the uncertainty involved in applying the currency approach to measuring the size of the hidden economy is so great as to make it hazardous to rely on such estimates

investment fact and fancy in yugoslavia this paper examines the roles of capacity and finance in yugoslav investment gross investment in producer durables is treated individually for industry other nonagriculture social agriculture and private agriculture along stock adjustment or alternatively flow adjustment lines inventory investment reflects sales and hoarding considerations each specification includes two types of finance namely intended credit and consonant with the firm s soft budget contraint unintended credit tested on newly complied data the functions indicate by statistical significance that capacity and finance matter in industry and other while capacity not finance matters in agriculture and inventory implications for development policy conclude the discussion alice did not like shaiking hands with either of them first for fear of hurting the other one s feelings so as the best way out of the difficulty she took hold of both hands at once the next moment they were dancing round in a ring lewis carroll throug