Informal Sector and Taxation

Jellal, Mohamed (2009): Informal Sector and Taxation.

Abstract

In this paper, we present a model of tax evasion in the presence of imperfect auditing. We show that there is a clear link between the degree of observability associated with a given taxpayer or activity and that taxpayer’s optimal declaration strategy with respect to fiscal agency. We also show that the degree of observability is critical in determining the optimal policies to be followed by the fiscal authorities. Our imperfect monitoring approach provides a new strategy for understanding the informal sector in LDCs, which can be interpreted as that group of economic activities characterized by low observability.

• Item Type: MPRA Paper
• Language: English
• Keywords: Informal sector;information and observability;tax evasion;taxation
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development

References

Allingham, M. and A. Sandmo (1972). Income tax evasion: a theoretical analysis.Journal of Public Economics 1, 323-338.

Besley, T. and J.McLaren ( 1993). Taxes and bribery: The role of wage incentives.Economic Journal 103, 119-141.

Boadway, R., Marchand .M and P. Pestieau (1994). Towards a Theory of the direct-indirect Tax mix. Journal of Public Economics 55, 71-88.

Border.,K and J.Sobel (1987). Samurai accountant: A Theory of auditing and plunder.Review of Economic Studies 54,525-540

Chander, P. and L. L. Wilde (1992). Corruption in tax administration.Journal of Public Economics 49, 33-349.

Chander, P. and L. L. Wilde (1998). A general characterization of optimalincome tax enforcement. Review of Economics Studies 65, 165-183.

Clotfelter, C. T. (1983). Tax evasion and tax rates. Review of Economics and Statistics 65, 363-373.

Cowell, F. A. (1985). Tax evasion with labor income. Journal of Public Economics 26,19-34.

Cowell, F. A. (1990). Cheating the Government. Cambridge, Massachusetts:The MIT Press.

Cremer, H. and F. Gahvari (1994). Tax evasion, concealment and the optimal linear income tax. The Scandinavian Journal of Economics 96, 219-239.

Dixit, A. and A. Sandmo (1977). Some simplified formulae for optimal income taxation.Scandinavian Journal of Economics 79, 417-423.

Dudley, L. And C.Montmarquette.(1987). Bureaucratic corruption as a constraint on voter Choice. Public Choice 55,127-160.

Flatters,F. And B. McLeod. (1995). Administrative corruption and taxation.International Tax and Public Finance 2, 397-417.

Fortin, B. and G. Lacroix (1996). Labour supply, tax evasion and the marginal cost of public funds. an empirical investigation. Journal of Public Economics 55, 407-431.

Greenberg ,J.(1984). Avoiding tax evasion: A repetead game theoretical approach.Journal of Economic Theory 32,1-13.

Kolm , S.C. (1973). A note on optimum tax evasion. Journal of Public Economics 2,256-270.

Laffont,J.J and J. Tirole (1993) . A Theory of Incentives in Procurement and Regulation.Cambridge, MIT Press.

Lucas, R.E.(1978). On the Size Distribution of Business Firms.Bell Journal of Economics 9:508-523

Rauch,J. (1991). Modeling the Informal Sector Formally. Journal of Development Economics 35:33-48.

Reinganum, J. F. and L. L. Wilde (1985). Income tax compliance in a principal-agent framework. Journal of Public Economics 26, 1-18.

Reinganum, J. F. and L. L. Wilde (1986). Equilibrium verification and reporting policies in a model of tax compliance. International Economic Review 27, 739-760.

Slemrod, J. and S. Yitzhaki (2002). Tax avoidance, evasion and administration. In A. J. Auerbach and M. Feldstein (Eds.), Handbook of Public Economics, Volume 3, pp. 1423-1470. Amsterdam: North Holland.

Srinivasan, T.N.(1973). Tax evasion: A model . Journal of Public Economics 2,339-346.

Tirole, J. (1986) . Hierarchies and bureaucraties: on the role of collusion in organizations.Journal of Law and Economics Organization 2,181-214.

Tirole, J.(1992). Collusion and Theory of Organizations. In J.J. Laffont, ed., Advances in economic theory. Proceedings of the 6th world congres of The Econometric Society, Cambridge University Press, Cambridge, 151-206.

Townsend, R.M (1979). Optimal Contract and Competitive Markets with Cosly Verification.Journal of Economic Theory 21: 256-293.

Virmani, A.( 1988). Tax Reform in Developing Countries: Issues, Policies, and Information Gaps. Public Finance 43:19-38.