Capital Subsidies and the Underground Economy

Francesco Busato (), Bruno Chiarini, Pasquale de Angelis and Elisabetta Marzano

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: In this paper we investigate the effects of different fiscal policies on the firm choice to produce underground. We consider a tax evading firm operating simultaneously both in the regular and in the underground economy. We suggest that such a kind of firm, referred to as moonlighting firm, is able to offset the specific costs usually stressed by literature on underground production, such as those suggested by Loayza (1994) and Anderberg et al. (2003). Investigating the effects of different fiscal policy interventions, we find that taxation is a critical parameter to define the size of capital allocation in the underground production. In fact, a strong and inverse relationship is found, and tax reduction is the best policy to reduce the convenience to produce underground. We also confirm the depressing effect on investment of taxation (see, for instance, Summers, 1981), so that tax reduction has no cost in terms of investment. By contrast, the model states that while enforcement is an effective tool to reduce capital allocation in the underground production, it also reduce the total capital stock. Moreover, we also suggest that the allowance of incentives to capital accumulation may generate, in this specific typology of firm, some unexpected effects, causing, together with a positive investment process, also an increase in the share of irregularity. This finding could explain, in a microeconomic framework, the evidence of Italian southern regions, where high incentives are combined with high irregularity ratios.

Keywords: evasion; moonlighting; capital subsidies; underground production. (search for similar items in EconPapers)
JEL-codes: E22 E26 H25 H26 (search for similar items in EconPapers)
Pages: 24
Date: 2005-07-10
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-reg
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://repec.econ.au.dk/repec/afn/wp/05/wp05_10.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aah:aarhec:2005-10

Access Statistics for this paper

More papers in Economics Working Papers from Department of Economics and Business Economics, Aarhus University
Bibliographic data for series maintained by ().