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Capital Subsidies and Underground Production

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  • Francesco Busato

    ()
    (CELPE University of Salerno, University of Napoli Parthenope)

  • Bruno Chiarini

    (CELPE University of Salerno, University of Napoli Parthenope)

  • Pasquale de Angelis

    ()
    (CELPE University of Salerno, University of Napoli Parthenope)

  • Elisabetta Marzano

    ()
    (CELPE University of Salerno, University of Napoli Parthenope)

Abstract

In this paper we investigate the effects of different fiscal policies on the firm choice to produce underground. We consider a tax evading firm operating simultaneously both in the regular and in the underground economy. We suggest that such a kind of firm, referred to as moonlighting firm, is able to offset the specific costs usually stressed by literature on underground production, such as those suggested by Loayza (1994) and Anderberg et alii (2003). Investigating the effects of different fiscal policy interventions, we find that taxation is a critical parameter to define the size of capital allocation in the underground production. In fact, a strong and inverse relationship is found, and tax reduction is the best policy to reduce the convenience to produce underground. We also confirm the depressing effect on investment of taxation (see, for instance, Summers, 1981), so that tax reduction has no cost in terms of investment. By contrast, the model states that while enforcement is an effective tool to reduce capital allocation in the underground production, it also reduce the total capital stock. Moreover, we also suggest that the allowance of incentives to capital accumulation may generate, in this specific typology of firm, some unexpected effects, causing, together with a positive investment process, also an increase in the share of irregularity. This finding could explain, in a microeconomic framework, the evidence of Italian southern regions, where high incentives are combined with high irregularity ratios.

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Bibliographic Info

Paper provided by CELPE - Centre of Labour Economics and Economic Policy, University of Salerno, Italy in its series CELPE Discussion Papers with number 96.

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Date of creation: Oct 2005
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Handle: RePEc:sal:celpdp:96

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Keywords: tax evasion; moonlighting; capital subsidies; underground production;

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  1. Chiarini Bruno & Marzano Elisabetta, 2004. "Dimensione e dinamica dell'economia sommersa: un approfondimento del "currency demand approach"," Politica economica, Società editrice il Mulino, Società editrice il Mulino, issue 3, pages 303-334.
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