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State Aid Policies and Underground Activities

Author

Listed:
  • Bruno Chiarini
  • Elisabetta Marzano
  • Francesco Busato
  • Pasquale De Angelis

Abstract

The main goal of this paper is to examine the implications of firm-oriented fiscal policies, such as capital subsidies and tax allowances, in an economy with an underground sector. In addition, we investigate whether the technology structure of “hidden” production may facilitate or counteract the effects of fiscal policies on firm behavior. Among our results we stress the following: first, capital subsidies promote tax evasion; these subsidies induce firms to increase actual capital accumulation (a level effect), but also produce a reduction in the regular share of aggregate capital stock (a composition effect). Second, tax relief reduces underground activities and fosters capital accumulation, as well as aggregate production. Third, the technology structure matters for determining how to allocate resources between formal and informal production, hence the amount of reported revenues.

Suggested Citation

  • Bruno Chiarini & Elisabetta Marzano & Francesco Busato & Pasquale De Angelis, 2007. "State Aid Policies and Underground Activities," Discussion Papers 4_2007, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
    • Handle: RePEc:prt:dpaper:4_2007
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    File URL: http://economia.uniparthenope.it/ise/sito/DP/DP_4_2007.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    State aid; tax exemptions; capital subsidies; tax evasion; underground production; physical capital accumulation.;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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