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State Aid Policies and Underground Activities

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

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.

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Paper provided by D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy in its series Discussion Papers with number 4_2007.

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Date of creation: 01 Apr 2007
Date of revision:
Handle: RePEc:prt:dpaper:4_2007
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  7. Bontempi Maria Elena & Giannini Silvia & Guerra Maria Cecilia & Tiraferri Angela, 2001. "Incentivi agli investimenti e tassazione dei profitti: l'impatto delle recenti riforme fiscali sul "cash flow" delle società di capitali," Politica economica - Journal of Economic Policy (PEJEP), Società editrice il Mulino, issue 3, pages 249-284.
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  12. Alm, James, 1985. "The Welfare Cost of the Underground Economy," Economic Inquiry, Western Economic Association International, vol. 23(2), pages 243-63, April.
  13. Busato, Francesco & Chiarini, Bruno & Rey, Guido M., 2012. "Equilibrium implications of fiscal policy with tax evasion: A long run perspective," International Review of Law and Economics, Elsevier, vol. 32(2), pages 197-214.
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  16. Bergström, Fredrik, 1998. "Capital Subsidies and the Performance of Firms," SSE/EFI Working Paper Series in Economics and Finance 285, Stockholm School of Economics.
  17. Francesco Busato & Bruno Chiarini, 2004. "Market and underground activities in a two-sector dynamic equilibrium model," Economic Theory, Springer, vol. 23(4), pages 831-861, May.
  18. Loayza, Norman A., 1997. "The economics of the informal sector : a simple model and some empirical evidence from Latin America," Policy Research Working Paper Series 1727, The World Bank.
  19. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
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  22. Rainer Nitsche & Paul Heidhues, 2006. "Study on methods to analyse the impact of state aid on competition," European Economy - Economic Papers 244, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  23. Dan Anderberg & Alessandro Balestrino & Umberto Galmarini, 2003. "Search and Taxation in a Model of Underground Economic Activities," Economic Inquiry, Western Economic Association International, vol. 41(4), pages 647-659, October.
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