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A model to estimate informal economy at regional level: Theoretical and empirical investigation

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  • Albu, Lucian-Liviu

Abstract

Many problems emerge since it is widely believed that high tax rates and ineffective tax collection by government are the main causes contributing to the rise of the informal economy. Already the economists have established a relationship between tax rates and tax evasion or size of the informal economy. The higher is the level of taxation, the greater incentive is to participate in informal economic activities and escape taxes. At the macroeconomic level, there is a number of so-called indirect methods used to estimate the size and dynamics of informal economy, reported in literature as “Monetary Approach”, “Implicit Labour Supply Method”, “National Accountancy”, “Energy Consumption Method”, etc. Unfortunately, many times there are huge differences among the estimated shares of informal or underground economy obtained by various methods. For instance, in case of Romania the figures are between about 20% of GDP, obtained on the base of the energy consumption method and more than 45% computed by using the monetary approach. Also, the figures reported by the National Institute for Statistics (NIS), based on national accounts methodology, increased (mainly due to changes in methodology) from about 5% in 1992, to 18% in 1997 and to 20-22% after 2000. Adding to these figures about 7% of GDP, representing the estimated level for self-consumption in case of a rural household, legal non-registered but informal, resulted that last years the informal economy is responsible of 27-29% of national economy. In this article, coming from certain general accepted finding of the theory in matter of modelling underground economy, we concentrate on evaluating analytically the limit-values of certain important parameters involved in models used to estimate the size of underground economy and to explain the mechanisms of its dynamics. Then we shall simulate some exercises on available data. The second goal of the paper is to report some conclusions of our investigation based on data supplied by special surveys organised in Romania. Also, in order to see since certain hypotheses (referring to the complex transmission mechanism from the tax policy decisions to the effective implication of agents into informal economy) are statistically verified and to extend the study from the aggregate level to a deep research inside the population set in regions, we used data supplied by this special large survey, which already were processed and are available in our database.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3760.

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Date of creation: 2007
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Handle: RePEc:pra:mprapa:3760

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Keywords: informal economy; invisible sector; tax rate; probability of detection; risk-aversion; computer assistance;

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References

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  1. Friedrich Schneider & Christopher Bajada, 2003. "The Size and Development of the Shadow Economies in the Asia-Pacific," Economics working papers, Department of Economics, Johannes Kepler University Linz, Austria 2003-01, Department of Economics, Johannes Kepler University Linz, Austria.
  2. Albu, Lucian-Liviu & Nicolae, Mariana, 2003. "Use of households survey data to estimate the size of the informal economy in Romania," MPRA Paper 14286, University Library of Munich, Germany.
  3. Albu, Lucian Liviu, 2007. "Underground Economy And Fiscal Policies Modeling," Working Papers of Institute for Economic Forecasting, Institute for Economic Forecasting 071202, Institute for Economic Forecasting.
  4. Isachsen, Arne Jon & Strom, Steiner, 1985. "The Size and Growth of the Hidden Economy in Norway," Review of Income and Wealth, International Association for Research in Income and Wealth, International Association for Research in Income and Wealth, vol. 31(1), pages 21-38, March.
  5. Pencavel, John H., 1979. "A note on income tax evasion, labor supply, and nonlinear tax schedules," Journal of Public Economics, Elsevier, Elsevier, vol. 12(1), pages 115-124, August.
  6. Albu, Lucian Liviu & Kim, Byung Yeon, 2002. "Households' Activities In Informal Economy: Size And Behavioural Aspects (Ii)," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 18-28, December.
  7. Clotfelter, Charles T, 1983. "Tax Evasion and Tax Rates: An Analysis of Individual Returns," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 363-73, August.
  8. Gibson, Bill & Kelley, Bruce, 1994. "A Classical Theory of the Informal Sector," The Manchester School of Economic & Social Studies, University of Manchester, University of Manchester, vol. 62(1), pages 81-96, March.
  9. Albu, Lucian Liviu, 2007. "Estimating the Size of Underground Economy in Romania," Working Papers of Institute for Economic Forecasting, Institute for Economic Forecasting 070601, Institute for Economic Forecasting.
  10. Albu, Lucian-Liviu & Kim, Byung-Yeon & Duchene, Gerard, 2002. "An attempt to estimate the size of informal economy based on household behaviour modeling," MPRA Paper 13026, University Library of Munich, Germany.
  11. Daniel Daianu & Lucian Albu, 1997. "Institutions, Strains and the Underground Economy," William Davidson Institute Working Papers Series 98, William Davidson Institute at the University of Michigan.
  12. 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.
  13. Lemieux, Thomas & Fortin, Bernard & Frechette, Pierre, 1994. "The Effect of Taxes on Labor Supply in the Underground Economy," American Economic Review, American Economic Association, American Economic Association, vol. 84(1), pages 231-54, March.
  14. Albu, Lucian-Liviu & Kim, Byung-Yeon & Duchene, Gerard, 2002. "Households’ activities in informal economy: size and behavioural aspects," MPRA Paper 13072, University Library of Munich, Germany.
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Cited by:
  1. Leibfritz, Willi, 2011. "Undeclared economic activity in central and eastern Europe -- how taxes contribute and how countries respond to the problem," Policy Research Working Paper Series 5923, The World Bank.
  2. Iancu, Aurel, 2007. "The Question of Economic Convergence - first part -," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 4(3), pages 5-18, September.
  3. Albu, Lucian Liviu, 2008. "A Model To Estimate Spatial Distribution Of Informal Economy," Journal for Economic Forecasting, Institute for Economic Forecasting, Institute for Economic Forecasting, vol. 5(4), pages 111-124, December.
  4. Albu, Lucian-Liviu & Ghizdeanu, Ion & Iorgulescu, Raluca, 2011. "Analysing drivers of and barriers to the sustainable development: hidden economy and hidden migration," MPRA Paper 32810, University Library of Munich, Germany.

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