Tax enforcement, technology, and the informal sector

Economic Systems, 2015, vol. 39, issue 1, 97-120

Abstract: Theoretical models of the informal sector mostly assume—or end up with—a positive correlation between a measure of taxes and the size of the informal sector. However, some recent empirical studies associate higher taxes with a smaller informal sector size. In this paper, we build a theoretical framework—an extension to a two-sector growth model—which allows us to unravel the negative correlation between informal sector size and taxes. We find that (a) a higher degree of tax enforcement, (b) a higher productivity of formal sector households, and (c) a lower physical capital depreciation rate make for a negative relation between these variables. Our results suggest that enforcement and technological factors are likely candidates to account for this relationship.

Keywords: Informal sector; Tax enforcement; Productivity (search for similar items in EconPapers)
JEL-codes: H21 H26 O17 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Tax Enforcement, Technology, and the Informal Sector (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:39:y:2015:i:1:p:97-120

DOI: 10.1016/j.ecosys.2014.05.007

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