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Might Fundamental Tax Reform Increase Criminal Activity?

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  • James R. Hines

Abstract

Fundamental tax reform, replacing the income tax with a sales tax, is commonly thought to reduce levels of criminal and other 'underground' economic activity by implicitly taxing their returns. This paper finds instead that the impact of tax reform depends on the relative labour intensity of production in the legitimate and illegitimate sectors of the economy. In the likely event that illegitimate output is produced by using more labour-intensive techniques than is legitimate output, then replacing an income tax with a sales tax reduces the cost of criminal and other underground activity, thereby stimulating its growth. Copyright (c) The London School of Economics and Political Science 2004.

Suggested Citation

  • James R. Hines, 2004. "Might Fundamental Tax Reform Increase Criminal Activity?," Economica, London School of Economics and Political Science, vol. 71(283), pages 483-492, August.
  • Handle: RePEc:bla:econom:v:71:y:2004:i:283:p:483-492
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    Citations

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    Cited by:

    1. M. Govinda Rao & R. Kavita Rao, 2005. "Trends and Issues in Tax Policy and Reform in India," India Policy Forum, Global Economy and Development Program, The Brookings Institution, vol. 2(1), pages 55-122.
    2. Bernardi, Luigi & Fumagalli, Laura & Gandullia, Luca, 2005. "Tax systems and tax reforms in south and East Asia: Overview of the tax systems and main policy tax issues," MPRA Paper 18214, University Library of Munich, Germany.
    3. Bibek Adhikari, 2015. "When Does Introducing a Value-Added Tax Increase Economic Efficiency? Evidence from the Synthetic Control Method," Working Papers 1524, Tulane University, Department of Economics, revised Nov 2015.
    4. Alan J. Auerbach, 2006. "The Choice Between Income and Consumption Taxes: A Primer," NBER Working Papers 12307, National Bureau of Economic Research, Inc.
    5. Richard M. Bird, 2005. "Value-Added Taxes in Developing and Transitional Countries: Lessons and Questions," International Tax Program Papers 0505, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
    6. Bernardi, Luigi & Gandullia, Luca & Fumagalli, Laura, 2005. "Tax Systems and Tax Reforms in South and East Asia: Overview of Tax Systems and main policy issues," MPRA Paper 1869, University Library of Munich, Germany.
    7. Stavros Katsios, 2006. "The Shadow Economy and Corruption in Greece," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 4(1), pages 61-80.
    8. Robert Ullmann & Christoph Watrin, 2008. "Comparing Direct and Indirect Taxation: The Influence of Framing on Tax Compliance," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 5(1), pages 23-56, June.

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