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Why Do Underground Reducing Policies Often Fail Their Scope? Some Answers From The Italian Experience

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  • BRUNO CHIARINI
  • MARCO DI DOMIZIO
  • ELISABETTA MARZANO

Abstract

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.

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  • Bruno Chiarini & Marco Di Domizio & Elisabetta Marzano, 2009. "Why Do Underground Reducing Policies Often Fail Their Scope? Some Answers From The Italian Experience," Economics and Politics, Wiley Blackwell, vol. 21(2), pages 308-318, July.
    • Handle: RePEc:bla:ecopol:v:21:y:2009:i:2:p:308-318
    DOI: 10.1111/j.1468-0343.2009.00348.x
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    1. Das-Gupta, Arindam & Mookherjee, Dilip, 1996. "Tax Amnesties as Asset-Laundering Devices," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 12(2), pages 408-431, October.
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    Cited by:

    1. Michele Bernasconi & Rosella Levaggi & Francesco Menoncin, 2020. "Dynamic Tax Evasion with Habit Formation in Consumption," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(3), pages 966-992, July.
    2. Bruno Chiarini & Simona Monteleone, 2016. "Discretionary policy, strategic complementarity and tax evasion: a strategic analysis of the Italian audit mechanism," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(1), pages 99-117, April.
    3. Raffaella Basile & Bruno Chiarini & Elisabetta Marzano, 2011. "Can we Rely upon Fiscal Policy Estimates in Countries with Unreported Production of 15 Per Cent (or more) of GDP?," CESifo Working Paper Series 3521, CESifo.
    4. Bruno Chiarini & Elisabetta Marzano & Friedrich Schneider, 2013. "Tax rates and tax evasion: an empirical analysis of the long-run aspects in Italy," European Journal of Law and Economics, Springer, vol. 35(2), pages 273-293, April.
    5. Giuseppe Ciccarone & Francesco Giuli, 2012. "Underground labor, search frictions and macroeconomic fluctuations," Departmental Working Papers of Economics - University 'Roma Tre' 0159, Department of Economics - University Roma Tre.

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