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Abstract:
This paper studies equilibrium effects of fiscal policy within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. There are three main results. (i) The underground sector mitigates the distortionary impact of fiscal policies, while lessening the drop (rise) of aggregate production after restrictive (expansionary) tax shifts. In this respect, tax evasion and the informal economy offer a channel for insuring income and consumption from distortions generated by fiscal policy. (ii) Tax evasion and underground economy can completely reverse the theoretical predictions of the standard neoclassical growth model and rationalize expansionary responses to contractionary fiscal policies. (iii) A dynamic general equilibrium with tax evasion gives a rational justification for a variant of the Laffer curve.

Two-sector Dynamic General Equilibrium Models, Fiscal Policy, Tax Evasion

Abstract:
This paper develops a new theoretical framework, introducing into the traditional real business cycle model a second sector, which we interpret as representing the underground economy. We find that a model with an underground sector is quite successful in matching the stylized facts of the business cycle, improving some unsatisfactory results such as the employment volatility puzzle and productivity puzzle. Further, we show that it produces substantial internal propagation of temporary shocks. Then we explain how the underground activity helps to mitigate recessions and the cost of high tax burdens by allowing the household to smooth consumption through a proper labor allocation between the two sectors.

Real business cycle, Underground Economy, Investment Volatility, Taxation

Abstract:
By using official time series of the Italian evaded VAT base (Ministry of Finance) for the period 1980-2004 we investigate empirically the long-run characteristics of tax evasion and the relationship with the tax burden. We focus on three important issues not analyzed so far. First, using different measures of aggregate economic activity as reference variables in estimating the average tax burden, we investigate the size and dynamics of the over-burden traceable back to tax evasion. Second, exploiting cointegration techniques, we quantify the elasticity between tax evasion and the average tax rate in Italy. We then comment on the complex dynamic interaction between tax burden and tax evasion, to ascertain whether in the Italian experience there is evidence for any “vicious circle” between them.

Tax evasion, VAT evasion, Effective Tax Rate, Apparent Tax Rate, VECM

Abstract:
By using official time series of the Italian evaded VAT base (Ministry of Finance) for the period 1980-2004 we investigate empirically the long-run characteristics of tax evasion and the relationship with the tax burden. We focus on three important issues not analyzed so far. First, using different measures of aggregate economic activity as reference variables in estimating the average tax burden, we investigate the size and dynamics of the over-burden traceable back to tax evasion. Second, exploiting cointegration techniques, we quantify the elasticity between tax evasion and the average tax rate in Italy. We then comment on the complex dynamic interaction between tax burden and tax evasion, to ascertain whether in the Italian experience there is evidence for any "vicious circle" between them.

tax evasion, VAT evasion, effective tax rate, apparent tax rate, VECM

Abstract:
This paper introduces underground activities and tax evasion into a one sector dynamic general equilibrium model with external effects. The model presents a novel mechanism driving the self-fulfilling prophecies, which is triggered by the reallocation of resources to the underground sector to avoid the excess tax burden. This mechanism differs from the customary one, and it is complementary to it. In addition, the explicit introduction of an (even tiny) underground sector allows to reduce the aggregate degree of increasing returns required for indeterminacy, and for having well behaved input demand schedules (in the sense they slope down).

Dynamic General Equilibrium Models, Fiscal Policy, Tax Evasion and Underground Activities, Sunspots

Abstract:
This paper shows that underground activities and tax evasion may be another possible source of local indeterminacy of the equilibrium path. We derive necessary and sufficient conditions for equilibrium path to be locally indeterminate under tax evasion and underground activities. Moreover, the explicit introduction of an (even small) underground sector into a one-sector general equilibrium model allow to reduce aggregate degree of increasing returns required for indeterminacy, and for having well behaved input demand schedules (in the sense that slope down). Finally, we show that under indeterminacy, an increase in corporate, labor or income tax rates has a non-Keynesian effect, i.e. the economy enters into an expansionary pattern. These effects are reversed when the steady state is saddle-path stable.

Dynamic General Equilibrium Models, Fiscal Policy, Tax Evasion and underground Activities, Indeterminacy and Sunspots

Abstract:
In this paper we investigate the relation between population, real wages and urbanization in the Italian economy during the period 1320-1870. In this period the prevailing conditions were those of a poor, mainly agricultural economy with limited human capital and rudimentary technology. However, these centuries witnessed the considerable growth of urban centers, which was not only a significant demographic phenomenon in itself. The multiplication of such agglomerations had a striking influence on mortality and hence on the general course of the economy in this period. Disease, warfare and famine, which for about 400 years had been the greatest "agents" of demographic dynamics, were the real engine of this economy. One of the main results of this paper is that this "engine", along with the urbanization process and the flows of rural immigrants which fuelled it, had profound, complex implications on productivity in agriculture and on wages and population dynamics.

Malthusian dynamics, urbanization, pre-industrial labor productivity, population trend, demographic changes

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.

State aid, capital subsidies, tax evasion, underground production, physical capital accumulation

Abstract:
This paper generates high frequency data for the underground labor and the underground production using a theoretical general equilibrium model, over the sample 1970:01-1992:04 (32 years; 128 observations). We compare selected time series properties of the generated series with those of the corresponding series estimated with classical methodologies. The generated series for underground labor and underground production present a wider range and are more volatile than all other series estimated with classical methodologies. The analysis, next, suggests that the underground labor is pro-cyclical with respect to the GDP, that is lagging it by approximately one quarter, and that underground labor series generated from the theoretical model are highly persistent. Finally, the estimated correlation between the cyclical component of our generated-from-theory underground labor productivity and the actual series of aggregate GDP is negative (-0.34), while official yearly estimates present a positive (but very low) correlation with the cyclical component of GDP (0.12). This suggests that the underground sector has a positive impact over the productivity at the business cycle frequency, while it dampens productivity fluctuations at a lower frequency.

Real Business Cycle Models, Underground Economy

Abstract:
In this paper we investigated empirically the nature of underground employment in Italy, considering its long-run trend and short-run fluctuations. The examined time series of underground employment is provided by the Italian National Institute of Statistics (ISTAT), though for the business cycle analysis we also employ a time series of evaded tax base provided by the Ministry of Finance. The analysis focuses on the period 1980-2003, a time span during which major labour market reforms occurred in Italy, with an evident impact on underground employment.

Our investigation pointed out several interesting regularities. Cyclical behaviour of the regular labour input is deeply affected by the aggregate measure of economic activity used as reference variables, i.e. total or market GDP. Second, the cyclical regularities indicate that the resources allocated to the underground economy are mostly motivated by flexibility requirements. Third, the dynamic adjustments of employment between the regular and underground market, are inextricably tied to one another over the cycle. Surprisingly, the relationship between the labour inputs changes with the GDP measure adopted. It may highlight a reallocation mechanism among labour inputs or a labour drag effect.

Underground employment; business cycle, labour allocation mechanism

Abstract:
In this paper we investigate the effects of different fiscal policies on the firm choice to produce underground. We consider a tax evading firm operating simultaneously both in the regular and in the underground economy. We suggest that such a kind of firm, referred to as moonlighting firm, is able to offset the specific costs usually stressed by literature on underground production, such as those suggested by Loayza (1994) and Anderberg et al. (2003). Investigating the effects of different fiscal policy interventions, we find that taxation is a critical parameter to define the size of capital allocation in the underground production. In fact, a strong and inverse relationship is found, and tax reduction is the best policy to reduce the convenience to produce underground. We also confirm the depressing effect on investment of taxation (see, for instance, Summers, 1981), so that tax reduction has no cost in terms of investment. By contrast, the model states that while enforcement is an effective tool to reduce capital allocation in the underground production, it also reduce the total capital stock. Moreover, we also suggest that the allowance of incentives to capital accumulation may generate, in this specific typology of firm, some unexpected effects, causing, together with a positive investment process, also an increase in the share of irregularity. This finding could explain, in a microeconomic framework, the evidence of Italian southern regions, where high incentives are combined with high irregularity ratios.

evasion, moonlighting, capital subsidies, underground production

Abstract:
This paper shows under indeterminacy and tax evasion, an increase in corporate, labor or income tax rates pushes the economy into an expansionary pattern. These effects are reversed when the steady state is saddle-path stable.

Dynamic General Equilibrium Models, Fiscal Policy, Tax Evasion and Underground Activities, Indeterminacy and Sunspots

Abstract:
This paper studies equilibrium effects of fiscal policy within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. In particular, we show that a dynamic general equilibrium with tax evasion may give a rational justification for a variant of the Laffer curve for a plausible parameterization. In this respect, the paper also identifies the different parameterization of the model formulation with tax evasion under which a Laffer curve exist. From a revenue maximizing perspective, the key policy messages are that bringing tax payers to compliance would be better than announcing to punish them if convicted, and that an economy without problems of compliance is much more sensitive to myopic behavior.

two-sector DGEM models, fiscal policy, tax evasion, underground activities

Abstract:
In this paper we investigated empirically the nature of the relation between underground employment and unions in Italy, focusing on certain productive sectors. The motivation for this analysis is the hypothesis of the existence of two different opposite channels through which unions affect underground employment: a macro-effect, generating shadow activities via higher wages and market rigidities; a micro-effect, entailing a negative impact of trade union power on underground employment. We consider two different measures of the bargaining power of trade unions, i.e. wages and net density. Econometric analysis of Italian data yields three main results. First, mechanisms of interaction between underground employment and unions change profoundly according to the nature of the industry. Second, the two indexes of the trade unions’ bargaining power play a different role vis-à-vis the extent of underground employment. Third, there is a counter-intuitive interaction between wage and underground employment, which may be explained in an insider-outsider framework.

underground economy, trade union power

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.

Abstract:
This paper studies equilibrium effects of fiscal policy disturbances within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. There are three main results. (i) The underground sector mitigates the distortionary impact of fiscal policies, while lessening the drop (and the rise) of aggregate production after restrictive (expansionary) tax shocks. (ii) Tax evasion and underground economy can rationalize expansionary response to contractionary fiscal policies; (iii) A dynamic general equilibrium with tax evasion gives a rational justification for a variant of the Laffer curve.

Two-sector Dynamic General Equilibrium Models, Fiscal Policy, Tax Evasion and Underground Activities

Abstract:
This paper considers changes in the membership composition of the three leading Italian trade union confederations during the last fifteen years. The analysis emphasizes the remarkable growth of membership among pensioners and the drop in active workers. The key issue here is that intergenerational aspects of unions' membership components are taken into account in the bargaining process. Unions internalize unemployment externalities on pension benefits resultant on the wage outcome as they consider the welfare of all their members in the economy. A formulation of the union monopoly model with endogenous membership supports these findings, while the econometric evaluation of the membership component effects shows that unions are forced to pursue wage moderation and improvements in employment conditions.