WHY DO UNDERGROUND REDUCING POLICIES OFTEN FAIL THEIR SCOPE? SOME ANSWERS FROM THE ITALIAN EXPERIENCE

Bruno Chiarini (), Marco Di Domizio () and Elisabetta Marzano

Economics and Politics, 2009, vol. 21, issue 2, pages 308-318

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.

Date: 2009

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