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TAX RATES, GOVERNANCE, AND THE INFORMAL ECONOMY IN HIGH‐INCOME COUNTRIES
Author(s) -
KUEHN ZOË
Publication year - 2014
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12021
Subject(s) - economics , corporate governance , informal sector , production (economics) , quality (philosophy) , economy , macroeconomics , market economy , finance , philosophy , epistemology
Approximately 16.7% of output in high‐income OECD (Organisation for Economic Cooperation and Development) countries is produced informally. I present a model economy where entrepreneurs decide how much of their production to keep informal. Informality carries a risk of getting caught, taxed, and fined. Results from a model with differences in tax rates alone only agree to approximately 23% with data on informality. Taking into account both governance quality and tax rates, agreement between the model's results and data increases to 72%. A policy experiment raising governance quality in Greece, Italy, Spain, and Portugal to Finnish standards reduces informality by 13 percentage points. (JEL E26, H26, J24 )