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Tax reforms and the underground economy: a simulation-based analysis

Barbara Annicchiarico () and Claudio Cesaroni
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Claudio Cesaroni: University of Rome Tor Vergata

International Tax and Public Finance, 2018, vol. 25, issue 2, No 7, 458-518

Abstract: Abstract This paper studies the effects of several tax reforms in an economy where taxes are partially evaded by means of undeclared work. To this purpose, we consider a two-sector dynamic general equilibrium model calibrated to Italy which explicitly accounts for underground production. We construct various tax reform scenarios, such as ex ante budget-neutral tax shifts from direct to indirect taxes, and tax cuts on labor and business financed by decreases of government spending. Our results indicate that neglecting the existence of the underground sector may lead to severely miscalculating the macroeconomic effects of tax reforms. Further, the dimension of the underground sector is permanently and considerably reduced by changes in the tax mix that diminish the labor tax wedge. Reductions of the business tax prove to be highly expansionary in the presence of a sizable informal sector.

Keywords: Dynamic general equilibrium model; Underground economy; Tax reforms; Italy (search for similar items in EconPapers)
JEL-codes: E62 O41 O52 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Tax Reforms and the Underground Economy: A Simulation-Based Analysis (2016) Downloads
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DOI: 10.1007/s10797-017-9450-7

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