Tax rates, governance, and the informal economy in high-income countries

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dc.contributor.author Kuehn, Zoë
dc.contributor.editor Universidad Carlos III de Madrid. Departamento de Economía
dc.date.accessioned 2008-01-14T12:49:17Z
dc.date.available 2008-01-14T12:49:17Z
dc.date.issued 2007-12
dc.identifier.issn 2340-5031
dc.identifier.uri http://hdl.handle.net/10016/1151
dc.description.abstract This paper studies the mechanisms behind the informal economy in high-income countries. About 16.3% of output in high-income OECD countries was produced informally in 2001-02. In a recent paper Davis and Henrekson [2004] show that there exists a positive relationship between tax rates and the informal economy for high-income OECD countries. Existing models of the informal economy mostly focus on developing countries. To account for the informal economy in high-income countries, build a model economy, following Lucas [1978], in which agents of different managerial abilities decide to become workers, managers of informal firms, or managers of formal firms. In contrast to formal managers, managers of informal firms do not pay taxes but run the risk of getting caught, taxed, and fined. A calibrated version of the model economy is able to generate the observed differences in informal economy of 21 high-income countries. Although tax rates are crucial for explaining the observed differences in informal economy, the quality of governance, the extent to which these tax rates are enforced, also plays an important role. Policy experiments show that by improving the enforcement of their tax policies countries can reduce informality. A smaller informal economy is accompanied by larger firms and higher productivity.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.language.iso eng
dc.relation.ispartofseries UC3M Working papers. Economics
dc.relation.ispartofseries 07-51
dc.rights Atribución-NoComercial-SinDerivadas 3.0 España
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.subject.other Informal economies
dc.subject.other High-income countries
dc.subject.other Tax rates
dc.subject.other Governance
dc.title Tax rates, governance, and the informal economy in high-income countries
dc.type workingPaper
dc.type workingPaper
dc.subject.jel O17
dc.subject.jel J22
dc.subject.jel H2
dc.subject.eciencia Economía
dc.rights.accessRights openAccess
dc.identifier.repec we078551
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