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(Tax evasion) power to the people: does "early democratization" increase the size of the informal sector?

  • Adam, Antonis
  • Kammas, Pantelis

This paper examines the political economy forces that lead to the creation of the informal sector in an economy. Our analysis treats unofficial economy as an endogenous outcome that may be produced by the conflict for redistribution between different groups of agents. The crucial factor in our analysis is whether the extension of voting franchise takes place before the consolidation of a strong state characterized by solid institutions (this is what we call "early democratization"). When this happens, distributional conflict affects the quality of institutions since the political elites have an incentive to decide weaker institutions which allows them to mitigate the tax burden fallen on their income. In the empirical section, we examine whether countries that experienced “early democratization” are characterized by relatively larger informal sectors. Our findings provide strong empirical evidence in favor of the implication driven by our theoretical model.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43343.

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Date of creation: 20 Dec 2012
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Handle: RePEc:pra:mprapa:43343
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  1. Matthias Doepke, . "To Segregate or to Integrate: Education Politics and Democracy," UCLA Economics Online Papers 411, UCLA Department of Economics.
  2. Dessy, Sylvain & Pallage, Stephane, 2003. "Taxes, inequality and the size of the informal sector," Journal of Development Economics, Elsevier, vol. 70(1), pages 225-233, February.
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  6. Stephane Straub, 2004. "Informal Sector: The Credit Market Channel," ESE Discussion Papers 101, Edinburgh School of Economics, University of Edinburgh.
  7. Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World: Size, Causes, and Consequences," IMF Working Papers 00/26, International Monetary Fund.
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  10. Torsten Persson & Guido Tabellini, 2009. "Democratic Capital: The Nexus of Political and Economic Change," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(2), pages 88-126, July.
  11. Simon Johnson & Daniel Kaufman & Andrei Shleifer, 1997. "The Unofficial Economy in Transition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 159-240.
  12. Axel Dreher & Christos Kotsogiannis & Steve McCorriston, 2005. "How Do Institutions Affect Corruption and the Shadow Economy," Discussion Papers 0505, Exeter University, Department of Economics.
  13. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, vol. 66(2), pages 293-312, November.
  14. Christian Traxler, 2009. "Voting over taxes: the case of tax evasion," Public Choice, Springer, vol. 140(1), pages 43-58, July.
  15. Rainald Borck, 2009. "Voting on redistribution with tax evasion," Social Choice and Welfare, Springer, vol. 32(3), pages 439-454, March.
  16. Robinson, James A. & Torvik, Ragnar, 2005. "White elephants," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 197-210, February.
  17. Aidt, T.S. & Dutta, Jayasri & Loukoianova, Elena, 2006. "Democracy comes to Europe: Franchise extension and fiscal outcomes 1830-1938," European Economic Review, Elsevier, vol. 50(2), pages 249-283, February.
  18. Chong, Alberto & Gradstein, Mark, 2006. "Inequality and Informality," CEPR Discussion Papers 5545, C.E.P.R. Discussion Papers.
  19. Andrei Shleifer & Robert W. Vishny, 1998. "The Quality of Government," Harvard Institute of Economic Research Working Papers 1847, Harvard - Institute of Economic Research.
  20. Dabla-Norris, Era & Gradstein, Mark & Inchauste, Gabriela, 2008. "What causes firms to hide output? The determinants of informality," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 1-27, February.
  21. James A. Robinson & Daron Acemoglu, 2000. "Political Losers as a Barrier to Economic Development," American Economic Review, American Economic Association, vol. 90(2), pages 126-130, May.
  22. Roine, Jesper, 2003. "The political economics of not paying taxes," SSE/EFI Working Paper Series in Economics and Finance 530, Stockholm School of Economics.
  23. Tedds, Lindsay, 2007. "Estimating the Income Reporting Function for the Self-Employed," MPRA Paper 4212, University Library of Munich, Germany.
  24. Carlo V Fiorio & Francesco D'Amuri, 2005. "Workers' Tax Evasion in Italy," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 64(2-3), pages 247-270, November.
  25. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
  26. Friedrich Schneider & Andreas Buehn & Claudio Montenegro, 2010. "New Estimates for the Shadow Economies all over the World," International Economic Journal, Taylor & Francis Journals, vol. 24(4), pages 443-461.
  27. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  28. Cebula, Richard, 1996. "An Empirical Analysis of the Impact of Government Tax and Auditing Policies on the Size of the Underground Economy: The Case of the United States, 1973-94," MPRA Paper 49810, University Library of Munich, Germany.
  29. Lindsay Tedds, 2010. "Estimating the income reporting function for the self-employed," Empirical Economics, Springer, vol. 38(3), pages 669-687, June.
  30. Traxler, Christian, 2012. "Majority voting and the welfare implications of tax avoidance," Journal of Public Economics, Elsevier, vol. 96(1), pages 1-9.
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