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WHY DO UNDERGROUND REDUCING POLICIES OFTEN FAIL THEIR SCOPE? SOME ANSWERS FROM THE ITALIAN EXPERIENCE
Author(s) -
CHIARINI BRUNO,
DOMIZIO MARCO DI,
MARZANO ELISABETTA
Publication year - 2009
Publication title -
economics and politics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.822
H-Index - 45
eISSN - 1468-0343
pISSN - 0954-1985
DOI - 10.1111/j.1468-0343.2009.00348.x
Subject(s) - incentive , reputation , enforcement , public economics , sanctions , scope (computer science) , order (exchange) , government (linguistics) , business , evasion (ethics) , tax incentive , work (physics) , economics , microeconomics , finance , engineering , political science , mechanical engineering , programming language , linguistics , philosophy , immune system , immunology , computer science , law , biology
Several European countries, facing a sizeable underground economy, often adopt underground reducing policies mainly based on incentives in the tax‐benefit system. Since empirical evidence manifests a substantial failure of such policies, we construct a simple model to indicate the crucial aspects of this failure. To this end we consider a tax‐evading firm, allocating work in the official and underground sector, where it is not taxed. With a view to reducing underground employment, the government may decide to launch an amnesty for past social security non‐compliance, while providing fiscal incentives for new hiring in order to encourage a process of worker regularization. Allowing for endogenous enforcement, we find that the reputation of policy‐makers in combating tax evasion proves crucial in determining the success of such a policy.