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Formal sector enforcement and welfare

Gareth Liu-Evans and Shalini Mitra

No 202030, Working Papers from University of Liverpool, Department of Economics

Abstract: Tax enforcement consistently lowers informality in the literature whereas the evidence is mixed for other factors affecting informality. Using several different samples of countries corresponding to different development levels, we find Rule of Law, the proxy for tax enforcement, to have a significant and robust effect on informality according to the continuous treatment test due to Belloni et al. (2014), which allows for uncertainty in the set of control variables via the use of a heteroscedasticity-robust Lasso method. A general equilibrium framework with heterogeneous firms and financial frictions further shows enforcement is welfarereducing for low to moderate costs of enforcement.

Keywords: Lasso; Informal sector; welfare; tax enforcement; borrowing constraints; tax evasion (search for similar items in EconPapers)
JEL-codes: H26 I30 O11 O17 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2020-10
New Economics Papers: this item is included in nep-dev and nep-iue
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