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Tax Collection, The Informal Sector, and Productivity

Listed author(s):
  • Julio C. Leal-Ordoñez

Some authors argue that informality is associated with distorted firm decisions and inefficiency. In this paper, I assess the quantitative effect of incomplete tax enforcement on aggregate output and productivity using a dynamic general equilibrium framework. I calibrate the model using data for Mexico and investigate the effects of introducing enforcement improvements. Under complete enforcement, labor productivity and output would be 19% higher under perfect competition and 34% higher under monopolistic competition. The source of this gain is the removal of distortions induced by incomplete enforcement of taxes which affect the economy in three ways: by reducing the capital-labor ratios of informal establishments; by allowing low-productive entrepreneurs to enter; and by misallocating resources towards low-productive establishments. I isolate the effects of pure factor misallocation, distorted occupational choices, capital accumulation, and complementarities.

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File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B721CBBC9-5A7A-B960-0F33-54EECD7E973E%7D.pdf
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Paper provided by Banco de México in its series Working Papers with number 2013-22.

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Date of creation: Dec 2013
Handle: RePEc:bdm:wpaper:2013-22
Contact details of provider: Web page: http://www.banxico.org.mx

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