Taxation, public services, and the informal sector in a model of endogenous growth
AbstractLarge informal sectors are an important characteristic of developing countries. The authors build a dynamic model in which the informal sector exists when overregulation (high tax rates and high cost for entering the formal sector) is coupled with an inefficient and corrupt system of compliance control. They consider a production technology in which public services are essential and subject to congestion. The public services are financed by taxes collected from the formal sector. Informal producers evade taxes and, because of their illegal status, can use only some public services, cannot use capital or insurance markets, and are subject to stochastic penalties. The authors find that the relative size of the informal sector is negatively related to the severity of the penalties and positively related to tax rates and the extent of informal use of public services. They also find that economies with larger informal sectors have lower capital return and growth rates because the contribution of public services to productivity decreases with informality. They argue that self-interested bureaucracies create an economic environment that makes informality attractive or simply unavoidable because they profit from the presence of the informal sector.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 1334.
Date of creation: 31 Aug 1994
Date of revision:
Economic Theory&Research; Banks&Banking Reform; Poverty Assessment; Environmental Economics&Policies; National Governance;
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.:
- Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
- Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
- Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
- Sergio Rebelo, 1999.
"Long Run Policy Analysis and Long Run Growth,"
Levine's Working Paper Archive
2114, David K. Levine.
- Sala-I-Martin, X. & Barro, R.J., 1991.
"Public Finance in Models of Economic Growth,"
640, Yale - Economic Growth Center.
- Robert J. Barro & Xavier Sala-i-Martin, 1990. "Public Finance in Models of Economic Growth," NBER Working Papers 3362, National Bureau of Economic Research, Inc.
- Barro, Robert J. & Sala-i-Martin, Xavier, 1992. "Public Finance in Models of Economic Growth," CEPR Discussion Papers 630, C.E.P.R. Discussion Papers.
- Gupta, Manash Ranjan, 1993. "Rural-urban migation, informal sector and development policies A theoretical analysis," Journal of Development Economics, Elsevier, vol. 41(1), pages 137-151, June.
- Alm, James & McClelland, Gary H. & Schulze, William D., 1992. "Why do people pay taxes?," Journal of Public Economics, Elsevier, vol. 48(1), pages 21-38, June.
- Marco Di Domizio, 2007.
"Effect of social contribution evasion on working time allocation: theoretical contribution in a two sector model,"
6_2007, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
- Marco Di Domizio, 2006. "Effect of Social Contribution Evasion on Working Time Allocation: Theoretical Contribution in a Two sector Model," Discussion Papers 16_2006, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
- Kendall K. Schaefer, 2003. "Capacity Utilization, Income Distribution, and the Urban Informal Sector: An Open-Economy Model," Working Papers wp35, Political Economy Research Institute, University of Massachusetts at Amherst.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).
If references are entirely missing, you can add them using this form.