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Tax Morale, Entrepreneurship, and the Irregular Economy

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Listed:
  • Gaetano Lisi

    (University of Cassino)

  • Maurizio Pugno

    (University of Cassino)

Abstract

This paper incorporates tax morale into a search and matching model of equilibrium unemployment, with on-the-job search, extended to both the irregular sector and entrepreneurship. Tax morale is modelled as a social norm for tax compliance which renders evasion costly. The moral cost of tax evasion (the strength of the social norm) is negatively related to the fraction of entrepreneurs that evades taxes. Precisely, if the relationship is nonlinear, multiple equilibria may emerge, thus accounting for differences in-between regions and countries in the size of the irregular sector. The "good" equilibrium is in fact characterised, with respect to the "bad" one, by a smaller irregular sector and a stronger tax morale.

Suggested Citation

  • Gaetano Lisi & Maurizio Pugno, 2011. "Tax Morale, Entrepreneurship, and the Irregular Economy," Working Papers 2011-01, Universita' di Cassino, Dipartimento di Economia e Giurisprudenza.
    • Handle: RePEc:css:wpaper:2011-01
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    Cited by:

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    2. Gabriele Ruiu & Gaetano Lisi, 2011. "Tax Morale, Slippery-Slope Framework and Tax Compliance: A Cross-section Analysis," Working Papers 2011-05, Universita' di Cassino, Dipartimento di Economia e Giurisprudenza.

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    More about this item

    Keywords

    tax morale; tax evasion; entrepreneurship; job search; irregular economy; shadow economy;
    All these keywords.

    JEL classification:

    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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