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

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  • Bruno Chiarini
  • Marco Di Domizio
  • Elisabetta Marzano

    (Department of Economic Studies, Parthenope University of Naples)

Abstract

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.
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Suggested Citation

  • Bruno Chiarini & Marco Di Domizio & Elisabetta Marzano, 2008. "Why do underground reducing policies often fail their scope? Some answers from the Italian experience," Working Papers 8_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
    • Handle: RePEc:prt:wpaper:8_2008
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    References listed on IDEAS

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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.
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    3. Eduardo Engel & James R. Hines Jr., 1998. "Understanding Tax Evasion Dynamics," Documentos de Trabajo 47, Centro de Economía Aplicada, Universidad de Chile.
    4. Snow, Arthur & Warren, Ronald Jr., 2005. "Tax evasion under random audits with uncertain detection," Economics Letters, Elsevier, vol. 88(1), pages 97-100, July.
    5. Das-Gupta, Arindam & Mookherjee, Dilip, 1996. "Tax Amnesties as Asset-Laundering Devices," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 12(2), pages 408-431, October.
    6. 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.
    7. Frank A. Cowell, 1990. "Cheating the Government: The Economics of Evasion," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262532484, December.
    8. Franzoni, Luigi Alberto, 1996. "Punishment and Grace: On the Economics of Tax Amnesties," Public Finance = Finances publiques, , vol. 51(3), pages 353-368.
    9. Francesco Busato & Bruno Chiarini, 2004. "Market and underground activities in a two-sector dynamic equilibrium model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(4), pages 831-861, May.
    10. Abowd, John M. & Kramarz, Francis, 2003. "The costs of hiring and separations," Labour Economics, Elsevier, vol. 10(5), pages 499-530, October.
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    Cited by:

    1. Bruno Chiarini & Simona Monteleone, 2016. "Discretionary policy, strategic complementarity and tax evasion: a strategic analysis of the Italian audit mechanism," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(1), pages 99-117, April.
    2. Giuseppe Ciccarone & Francesco Giuli, 2012. "Underground labor, search frictions and macroeconomic fluctuations," Departmental Working Papers of Economics - University 'Roma Tre' 0159, Department of Economics - University Roma Tre.
    3. Michele Bernasconi & Rosella Levaggi & Francesco Menoncin, 2020. "Dynamic Tax Evasion with Habit Formation in Consumption," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(3), pages 966-992, July.
    4. Chiarini Bruno & Ferrara Maria & Marzano Elisabetta, 2024. "Noncompliant behaviors in general equilibrium: A survey," Journal of Economic Surveys, Wiley Blackwell, vol. 38(3), pages 931-955, July.
    5. Bruno Chiarini & Elisabetta Marzano & Friedrich Schneider, 2013. "Tax rates and tax evasion: an empirical analysis of the long-run aspects in Italy," European Journal of Law and Economics, Springer, vol. 35(2), pages 273-293, April.
    6. Raffaella Basile & Bruno Chiarini & Elisabetta Marzano, 2011. "Can we Rely upon Fiscal Policy Estimates in Countries with Unreported Production of 15 Per Cent (or more) of GDP?," CESifo Working Paper Series 3521, CESifo.

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    Keywords

    Irregular labour input; enforcement; Fiscal Authority efficiency; regularization policy; incentives in the firm’s tax structure;
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