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Informal Sector and Taxation

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  • Jellal, Mohamed

Abstract

In this paper, we present a model of tax evasion in the presence of imperfect auditing. We show that there is a clear link between the degree of observability associated with a given taxpayer or activity and that taxpayer’s optimal declaration strategy with respect to fiscal agency. We also show that the degree of observability is critical in determining the optimal policies to be followed by the fiscal authorities. Our imperfect monitoring approach provides a new strategy for understanding the informal sector in LDCs, which can be interpreted as that group of economic activities characterized by low observability.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17129.

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Date of creation: 02 Aug 2009
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Handle: RePEc:pra:mprapa:17129

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Keywords: Informal sector; information and observability; tax evasion; taxation;

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  1. Srinivasan, T. N., 1973. "Tax evasion: A model," Journal of Public Economics, Elsevier, Elsevier, vol. 2(4), pages 339-346.
  2. Fortin, B. & Lacroix, G., 1991. "Labour Supply, Tax Evasion and the Marginal Cost of Public Funds: An Empirical Investigation," Cahiers de recherche, Université Laval - Département d'économique 9114, Université Laval - Département d'économique.
  3. Kolm, Serge-Christophe, 1973. "A note on optimum tax evasion," Journal of Public Economics, Elsevier, Elsevier, vol. 2(3), pages 265-270, July.
  4. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier.
  5. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 1(3-4), pages 323-338, November.
  6. Cremer, Helmuth & Gahvari, Firouz, 1994. " Tax Evasion, Concealment and the Optimal Linear Income Tax," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 96(2), pages 219-39.
  7. Virmani, Arvind, 1988. "Tax Reform in Developing Countries: Issues, Policies, and Information Gaps," Public Finance = Finances publiques, , , vol. 43(1), pages 19-38.
  8. Leonard Dudley & Claude Montmarquette, 1987. "Bureaucratic corruption as a constraint on voter choice," Public Choice, Springer, Springer, vol. 55(1), pages 127-160, September.
  9. Besley, Timothy & McLaren, John, 1993. "Taxes and Bribery: The Role of Wage Incentives," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 103(416), pages 119-41, January.
  10. Frank Flatters & W. Macleod, 1995. "Administrative corruption and taxation," International Tax and Public Finance, Springer, Springer, vol. 2(3), pages 397-417, October.
  11. Chander, Parkash & Wilde, Louis L, 1998. "A General Characterization of Optimal Income Tax Enforcement," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 65(1), pages 165-83, January.
  12. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, Elsevier, vol. 26(1), pages 1-18, February.
  13. Reinganum, Jennifer F & Wilde, Louis L, 1986. "Equilibrium Verification and Reporting Policies in a Model of Tax Compliance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 739-60, October.
  14. Dixit, Avinash K & Sandmo, Angar, 1977. " Some Simplified Formulae for Optimal Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 79(4), pages 417-23.
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