Capital Subsidies and Underground Production
AbstractIn 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 InfoPaper provided by CELPE (Centre of Labour Economics and Economic Policy), University of Salerno, Italy in its series CELPE Discussion Papers with number 96.
Date of creation: Oct 2005
Date of revision:
tax evasion; moonlighting; capital subsidies; underground production;
Find related papers by JEL classification:
- E26 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-20 (All new papers)
- NEP-MAC-2005-12-20 (Macroeconomics)
- NEP-PBE-2005-12-20 (Public Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bruno Chiarini & Elisabetta Marzano, 2004.
"Dimensione E Dinamica Dell'Economia Sommersa: Un Approfondimento Del Currency Demand Approach,"
4_2004, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
- Chiarini Bruno & Marzano Elisabetta, 2004. "Dimensione e dinamica dell'economia sommersa: un approfondimento del "currency demand approach"," Politica economica, Società editrice il Mulino, issue 3, pages 303-334.
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