Optimal redistribution with a shadow economy

Paweł Doligalski () and Luis Rojas
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Paweł Doligalski: School of Economics, University of Bristol

Theoretical Economics, 2023, vol. 18, issue 2

Abstract: We extend the theory of optimal redistributive taxation to economies with an informal sector. In particular, in our model workers can supply labor simultaneously to the formal and the informal sectors, which we call moonlighting. The optimal tax formula contains two novel terms capturing informality responses on an intensive and an extensive margin. Both terms decrease the optimal tax rates. We estimate the model with Colombian data and find that informality strongly reduces tax rates at all income levels. The possibility to migrate to entirely informal employment restricts tax rates at low and medium income levels, while the possibility of moonlighting is relevant at higher earnings.

Keywords: Income Taxation; Redistribution; Informal Sector; Moonlighting (search for similar items in EconPapers)
JEL-codes: H21 H26 J46 (search for similar items in EconPapers)
Date: 2023-05-11
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Optimal Redistribution with a Shadow Economy (2018)
Working Paper: Optimal Redistribution with a Shadow Economy (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:the:publsh:4569

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