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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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    References listed on IDEAS

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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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    8. repec:bla:econom:v:67:y:2000:i:266:p:153-76 is not listed on IDEAS
    9. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    10. Francesco Busato & Bruno Chiarini, 2004. "Market and underground activities in a two-sector dynamic equilibrium model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(4), pages 831-861, May.
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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. 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.
    4. 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.
    5. 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.

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