RT Generic
T1 Tax rates, governance, and the informal economy in high-income countries
A1 Kuehn, Zoë
A2 Universidad Carlos III de Madrid. Departamento de Economía, 
AB 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. Ina recent paper Davis and Henrekson [2004] show that there exists a positive relationshipbetween tax rates and the informal economy for high-income OECD countries. Existing modelsof the informal economy mostly focus on developing countries. To account for the informaleconomy in high-income countries, build a model economy, following Lucas [1978], in whichagents 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 notpay taxes but run the risk of getting caught, taxed, and fined. A calibrated version of the modeleconomy is able to generate the observed differences in informal economy of 21 high-incomecountries. Although tax rates are crucial for explaining the observed differences in informaleconomy, the quality of governance, the extent to which these tax rates are enforced, also playsan important role. Policy experiments show that by improving the enforcement of their taxpolicies countries can reduce informality. A smaller informal economy is accompanied by largerfirms and higher productivity.
SN 2340-5031
YR 2007
FD 2007-12
LK https://hdl.handle.net/10016/1151
UL https://hdl.handle.net/10016/1151
LA eng
LA eng
DS e-Archivo
RD 3 may. 2024