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Keywords
UNDEGROUND ECONOMY, TAX EVASION, FISCAL AMNESTIES, OPTIMAL FISCAL POLICY, INDETERMINANCY OF EQUILIBRIA, TIME CONSISTENCY, NUMERICAL SIMULATION, ILLEGAL ECONOMY, LABOUR MARKET

Macroeconomic and Policy Implications of Underground Economy and Tax Evasion

Università degli Studi di Napoli "Parthenope"
Abstract
The project research aims to investigate several fiscal policy aspects under a sizeable underground economy and tax evasion. In particular, we plan the following:
1) A dynamic general equilibrium structure in order to analyse a) the inter-relationships between underground sector-tax evasion and fiscal policy, in the long run and in the short run; b) sunspot effects that an underground production along with regular production, may generate under certain circumstances.
2) An analysis of optimal taxation policies under tax evasion using concepts and theorems belonging to the dynamic game theory (markovian perfect equilibria)
3) Partial dynamic equilibrium models for studying the effects of fiscal amnesties upon the firms’ behaviours which are able to operate in both the sectors (regular and underground)
4) Microeconomic models useful to estimate some dimension of the underground production, taking into account the relationship between regular firms and illegal economy.

Principal Investigator
Bruno Chiarini Università degli Studi di NAPOLI "Parthenope"
Research Objectives
The research aims to investigate the relationship between fiscal policy, underground economy and tax evasion. We plan to study four aspects of this relationship: positive (Research unit 1); theoretical (Research unit 2); normative (Research unit 3) and empirical (Research unit 4).
We aim to study the macroeconomic and microeconomic implications and the dynamics effects of the fiscal policy under tax evasion. Precisely, we investigate on: the effects of tax policies under underground economy and the effects of fiscal amnesties (Research unit 1); the possibility that the economy may generate aggregate externalities in presence of an underground sector (Research unit 2); the time consistent and optimal tax policy under tax evasion (Research unit 3); the real motivations that lead firms to operate in the underground and illegal sectors (Research unit 4).

Studying these aspects is crucial for understanding the industrialized economies (and, in particular, the Italian economy) which show a sizeable share of resources employed in the underground economy and, therefore, a relevant tax evasion. Thus, the proposed research aims also to fill the gap in the scientific literature, providing some theoretical and methodological works and some policy suggestion. This work should be useful to better outline the phenomenon and the relative policy analysis.
The methodological frameworks which the plan project should calling for are the following:
1 >>>

Timescale
24 months
National and international background
The estimation of the real size of the underground economy and the relative tax evasion is a difficult task, (Chiarini and Marzano 2004), nonetheless several interesting considerations apply in economies characterized by a sizeable underground sector, both for policy makers and for researchers (Feige 1989; Frey and Pommerehne 1984; Schneider 1994; Tanzi 1999; Thomas 1992, 1999; Giles 1999, Schneider and Enste 2000; Busetta and Giovannini 1998). As stressed by Schneider and Enste (2000,2002), and by several authors within the recent Economic Journal symposium (EJ vol. 109, 1999, see Thomas, Bhattacharyya, Tanzi, Giles), the underground economy is a sizeable and increasing phenomenon both in terms of output produced and labour input employed in all the OECD economies.


Among the most important studies on the underground economy there is the literature on the reaction of firms and households who are pushed to cope with the informal sector by complex tax systems and taxation and social security burden. Many others, aim to show the implication of the underground behaviour for the dynamic of the budget deficits and taxation. A further subject investigated by the literature on the black economy is the unreliability of the official statistics on production, employment and unemployment (Tanzi 1999; Thomas 1999; Chiarini and Marzano 2004). Some others research have dealt with the analysis of the labour market (Boeri and Garibaldi 2001, 2005; Bianco, 2002 >>>