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(Tax evasion) power to the people: does "early democratization" increase the size of the informal sector?

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  • Adam, Antonis
  • Kammas, Pantelis

Abstract

This paper examines the political economy forces that lead to the creation of the informal sector in an economy. Our analysis treats unofficial economy as an endogenous outcome that may be produced by the conflict for redistribution between different groups of agents. The crucial factor in our analysis is whether the extension of voting franchise takes place before the consolidation of a strong state characterized by solid institutions (this is what we call "early democratization"). When this happens, distributional conflict affects the quality of institutions since the political elites have an incentive to decide weaker institutions which allows them to mitigate the tax burden fallen on their income. In the empirical section, we examine whether countries that experienced “early democratization” are characterized by relatively larger informal sectors. Our findings provide strong empirical evidence in favor of the implication driven by our theoretical model.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43343.

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Date of creation: 20 Dec 2012
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Handle: RePEc:pra:mprapa:43343

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Keywords: Redistribution; Inequality; Tax Evasion;

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