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Does tax evasion affect unemployment and educational choice?

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Author Info

  • Kolm, Ann-Sofie

    (IFAU - Institute for Labour Market Policy Evaluation)

  • Larsen, Birthe

    (Copenhagen Business School)

Abstract

To examine the macro economic effects of government tax and punishment policies, this paper develops a three-sector general quilibrium model featuring matching frictions, heterogenous abilities and an informal sector with tax evasion. The choice of education is determined endogenously. Job opportunities in an informal sector are available only to workers who choose not to acquire higher education. We find that increased punishment of informal activities increases the number of educated workers and reduces the number of unemployed workers. Characterizing the optimal tax and punishment system, we show that it is optimal to more than fully counteract the distortion created by the government’s inability to tax the informal sector. The optimal choice of tax and punishment system, however, implies an inefficiently low stock of educated workers.

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Bibliographic Info

Paper provided by IFAU - Institute for Evaluation of Labour Market and Education Policy in its series Working Paper Series with number 2004:4.

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Length: 37 pages
Date of creation: 15 Apr 2004
Date of revision:
Handle: RePEc:hhs:ifauwp:2004_004

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Keywords: Tax evasion; underground economy; education; matching; unemployment;

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References

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  1. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
  2. Kolm, Anne-Sofie & Larsen, Birthe, 2003. "Wages, unemployment, and the underground economy," Working Papers 11-2003, Copenhagen Business School, Department of Economics.
  3. Kolm, Ann-Sofie & Larsen, Birthe, 2002. "Social norm, the informal sector and unemployment," Working Papers 04-2002, Copenhagen Business School, Department of Economics.
  4. Cremer, Helmuth & Gahvari, Firouz, 1993. "Tax evasion and optimal commodity taxation," Journal of Public Economics, Elsevier, vol. 50(2), pages 261-275, February.
  5. Boeri, Tito & Garibaldi, Pietro, 2002. "Shadow Activity and Unemployment in a Depressed Labour Market," CEPR Discussion Papers 3433, C.E.P.R. Discussion Papers.
  6. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier.
  7. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  8. Pestieau, P. & Possen, U., 1990. "Tax evasion and occupational choice," CORE Discussion Papers 1990033, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Jung, Young H. & Snow, Arthur & Trandel, Gregory A., 1994. "Tax evasion and the size of the underground economy," Journal of Public Economics, Elsevier, vol. 54(3), pages 391-402, July.
  10. Jacques, Jean-François & Fugazza, Marco, 2004. "Labor market institutions, taxation and the underground economy," Economics Papers from University Paris Dauphine 123456789/1888, Paris Dauphine University.
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Citations

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Cited by:
  1. Paul Castillo B. & Carlos Montoro Ll., 2012. "Inflation Dynamics in the Presence of Informal Labour Markets," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 15(1), pages 4-31, April.
  2. Bosch, Mariano & Maloney, William, 2008. "Cyclical movements in unemployment and informality in developing countries," Policy Research Working Paper Series 4648, The World Bank.
  3. James Albrecht & Lucas Navarro & Susan Vroman, 2009. "The Effects of Labour Market Policies in an Economy with an Informal Sector," Economic Journal, Royal Economic Society, vol. 119(539), pages 1105-1129, 07.
  4. Batini, Nicoletta & Kim, Young-Bae & Levine, Paul & Lotti, Emanuela, 2011. "Informal Labour and Credit Markets: A Survey," Working Papers 11/94, National Institute of Public Finance and Policy.
  5. Mariano Bosch, 2006. "Job creation and job destruction in the presence of informal labour markets," LSE Research Online Documents on Economics 19785, London School of Economics and Political Science, LSE Library.
  6. Castillo, Paul & Montoro, Carlos, 2010. "Monetary Policy in the presence of Informal Labour Markets," Working Papers 2010-009, Banco Central de Reserva del Perú.
  7. repec:wii:bpaper:bowp:094 is not listed on IDEAS
  8. Mariano Bosch & Julen Esteban-Pretel, 2009. "Cyclical Informality and Unemployment," CIRJE F-Series CIRJE-F-613, CIRJE, Faculty of Economics, University of Tokyo.
  9. Bosch, Mariano & Esteban-Pretel, Julen, 2012. "Job creation and job destruction in the presence of informal markets," Journal of Development Economics, Elsevier, vol. 98(2), pages 270-286.
  10. Österholm, Pär, 2004. "Estimating the Relationship between Age Structure and GDP in the OECD Using Panel Cointegration Methods," Working Paper Series 2004:13, Uppsala University, Department of Economics.
  11. Ann-Sofie Kolm & S�Ren Bo Nielsen, 2008. "Under-reporting of Income and Labor Market Performance," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(2), pages 195-217, 04.
  12. Isilda Mara & Edlira Narazani, 2011. "The Effects of Flat Tax on Inequality and Informal Employment: The Case of Albania," wiiw Balkan Observatory Working Papers 94, The Vienna Institute for International Economic Studies, wiiw.

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