Why do underground reducing policies often fail their scope? Some answers from the Italian experience
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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| Length: | 19 pages |
| Date of creation: | Aug 2008 |
| Date of revision: | |
| Handle: | RePEc:prt:wpaper:8_2008 |
| Contact details of provider: | Postal: Phone: ++39-81-5512207 Fax: ++39-81-5511140 Web page: http://economia.uniparthenope.it/ise/sito/index.htmEmail: More information through EDIRC
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References listed on IDEAS
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NBER Working Papers
2096, National Bureau of Economic Research, Inc.
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Documentos de Trabajo
47, Centro de Economía Aplicada, Universidad de Chile.
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- 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.
- 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.
- 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.
- 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.
- Franzoni, Luigi Alberto, 1996. "Punishment and Grace: On the Economics of Tax Amnesties," Public Finance = Finances publiques, , vol. 51(3), pages 353-68.
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