What is it about?
In the paper we study the impact of productivity growth and fiscal reforms (in particular a flat tax reform) on tax compliance with a quantitative model calibrated to Bulgaria. Bulgaria is an ideal case-study since it has the highest degree of informal economic activity among European countries and moreover it underwent a significant number of tax reforms in the 2000-2014 period. We find that the most important factor for reducing informal economy is labor productivity growth, which accounts for more than 75% of the change. The variation in corporate income tax accounts for the rest. We find that the 2008 flat tax reform did not play any visible role in coping with informality.
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Why is it important?
The results of the paper are quite interesting and to some extent “unconventional”: we find that the flat tax reform had only a marginal impact in improving tax compliance. The reason is the following: tax evasion occurs more among production units that are less productive and these were not affected very much by the flat tax which instead decreased dramatically the tax rate on more productive units which do not evade significantly in the first place.
Perspectives
Understanding how tax reforms affect the incentives for income under-reporting is key to better assess the welfare consequences of such reforms. For ex., Alstadsaeter, Johannesen and Zucman (AER, Forthcoming) show that accounting for income and wealth misreporting is fundamental to measure accurately inequality and welfare, using administrative data from Scandinavian countries. Our paper provides a complementary view using data from Eastern Europe, where tax evasion is much more substantial.
Alessandro Di Nola
Universitat Konstanz
Read the Original
This page is a summary of: Envelope wages, hidden production and labor productivity, The B E Journal of Macroeconomics, April 2019, De Gruyter,
DOI: 10.1515/bejm-2018-0252.
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