Why Do Underground Reducing Policies Often Fail Their Scope? Some Answers from the Italian Experience

11 Pages Posted: 8 Jun 2009

See all articles by Bruno Chiarini

Bruno Chiarini

University of Naples, Parthenope

Marco Di Domizio

affiliation not provided to SSRN

Elisabetta Marzano

University of Naples Parthenope - Department of Economic Studies (DES)

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.

Suggested Citation

Chiarini, Bruno and DOMIZIO, MARCO DI and Marzano, Elisabetta, Why Do Underground Reducing Policies Often Fail Their Scope? Some Answers from the Italian Experience. Economics & Politics, Vol. 21, Issue 2, pp. 308-318, July 2009, Available at SSRN: https://ssrn.com/abstract=1415089 or http://dx.doi.org/10.1111/j.1468-0343.2009.00348.x

Bruno Chiarini

University of Naples, Parthenope ( email )

Via Generale Parisi 13
Napoli, 80133
Italy

MARCO DI DOMIZIO

affiliation not provided to SSRN

Elisabetta Marzano

University of Naples Parthenope - Department of Economic Studies (DES) ( email )

via Medina 40
Naples, 80133
Italy

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