Tax Collection, The Informal Sector, and Productivity

Leal-Ordoñez Julio C.
Authors registered in the RePEc Author Service: Julio César Leal Ordóñez

No 2013-22, Working Papers from Banco de México

Abstract: Some authors argue that informality is associated with distorted firm decisions and inefficiency. In this paper, I assess the quantitative effect of incomplete tax enforcement on aggregate output and productivity using a dynamic general equilibrium framework. I calibrate the model using data for Mexico and investigate the effects of introducing enforcement improvements. Under complete enforcement, labor productivity and output would be 19% higher under perfect competition and 34% higher under monopolistic competition. The source of this gain is the removal of distortions induced by incomplete enforcement of taxes which affect the economy in three ways: by reducing the capital-labor ratios of informal establishments; by allowing low-productive entrepreneurs to enter; and by misallocating resources towards low-productive establishments. I isolate the effects of pure factor misallocation, distorted occupational choices, capital accumulation, and complementarities.

JEL-codes: E23 E26 O17 O40 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-dge, nep-eff, nep-iue, nep-law, nep-mac and nep-pbe
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Related works:
Journal Article: Tax collection, the informal sector, and productivity (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bdm:wpaper:2013-22

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