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Why do underground reducing policies often fail their scope? Some answers from the Italian experience

  • Bruno Chiarini
  • Marco Di Domizio
  • Elisabetta Marzano

    (Department of Economic Studies, Parthenope University of Naples)

Several European countries, facing a sizeable underground economy, often adopt underground reducing policies mainly based on incentives in the tax-benefit system. Since empirical evidence manifests a substantial failure of such policies, we construct a simple model to indicate the crucial aspects of this failure. To this end we consider a tax-evading firm, allocating work in the official and underground sector, where it is not taxed. With a view to reducing underground employment, the government may decide to launch an amnesty for past social security non-compliance, while providing fiscal incentives for new hiring in order to encourage a process of worker regularization. Allowing for endogenous enforcement, we find that the reputation of policy-makers in combating tax evasion proves crucial in determining the success of such a policy. Copyright 2009 Blackwell Publishing Ltd.

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Paper provided by D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy in its series Working Papers with number 8_2008.

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Length: 19 pages
Date of creation: Aug 2008
Date of revision:
Handle: RePEc:prt:wpaper:8_2008
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  1. Herman B. Leonard & Richard J. Zeckhauser, 1987. "Amnesty, Enforcement, and Tax Policy," NBER Chapters, in: Tax Policy and the Economy, Volume 1, pages 55-86 National Bureau of Economic Research, Inc.
  2. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  3. Franzoni, Luigi Alberto, 2000. "Amnesties, Settlements and Optimal Tax Enforcement," Economica, London School of Economics and Political Science, vol. 67(266), pages 153-76, May.
  4. 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.
  5. Eduardo Engel & James R. Hines Jr., 1998. "Understanding Tax Evasion Dynamics," Documentos de Trabajo 47, Centro de Economía Aplicada, Universidad de Chile.
  6. Snow, Arthur & Warren, Ronald Jr., 2005. "Tax evasion under random audits with uncertain detection," Economics Letters, Elsevier, vol. 88(1), pages 97-100, July.
  7. Franzoni, Luigi Alberto, 1996. "Punishment and Grace: On the Economics of Tax Amnesties," Public Finance = Finances publiques, , vol. 51(3), pages 353-68.
  8. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
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