Why Do Underground Reducing Policies Often Fail Their Scope? Some Answers From the Italian Experience

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. Copyright 2009 Blackwell Publishing Ltd.

Dynamic Tax Evasion with Habit Formation in Consumption*

“…Accordingly, evasion can be fought more effectively by increasing the fine than it can by increasing the number of controls. This result is in line with empirical evidence (Chiarini et al ., ; Feige and Cebula, ) showing that tax evasion is decreasing in the audit rate, but it can also explain why the number of audits is decreasing over time (Slemrod, ). If fines are more effective in reducing tax evasion and are less costly than audits, it might make sense to reduce audits.…”

Can We Rely Upon Fiscal Policy Estimates in Countries with Unreported Production of 15 Per Cent (or More) of GDP?

“…8 Similarly to other studies we excluded interest payments as they largely depend on the debt stock and therefore are not a discretionary fiscal policy tool. and unreported production/tax evasion examined elsewhere (see Chiarini et al 2011). 9 Such fiscal aggregates have become standard in this literature since government spending on goods and services might have different effects, as it directly affects the aggregate demand of the economy, while transfers and taxes exert their effects through real disposable income that could be partially saved.…”

“…The figures emphasize that, when considering broader measures of the GDP, the negative impact of the tax rate tends to vanish. 30 See Busato and Chiarini (2004), and Busato, Chiarini and Marzano (2009). 31 See, for instance, Blanchard and Perotti (2002), Perotti (2005), and Mountford and Uhlig (2005).…”

“…However, in order to overcome some of the shortcomings of this approach, another stream of literature focuses on different determinants, for instance institutional or governance quality, and social norms (Torgler and Schneider, 2006;2007) or law abidance (Orviska and Hudson, 2003;Orviska et al, 2006). For a study of the phenomenon in Italy, see, amongst others, Busato and Chiarini (2004), Bordignon and Zanardi (1997), Cannari and D'Alessio (2007), Chiarini et al (2009;2011), the papers in Guerra and Zanardi (2007), the ISAE Report ( 2006) and the papers on the Italian Revenue Agency web site: http://www1.agenziaentrate.it/ufficiostudi/.…”

Uncovering Unobserved Economy: A General Equilibrium Characterization

“…Chiarini et al . () endogenize the probability of being detected in belonging to underground economy in a partial equilibrium framework, through a function that depends, as in our model, to the degree of efficiency in the audit activity at the denominator; but instead of considering the number of fiscal agents in the numerator, it takes the number of irregular workers.…”