Measuring Tax Burdens in the Presence of Non Observed Incomes

The Tax-to-GDP ratio is an important tool for both economists and policymakers. Despite its pivotal role, this indicator is measured and analyzed without due attention to the potential biases stemming from the so called non-observed economy. This note aims at filling this gap, pointing out the effects of untaxed and undeclared incomes on both sides of the Tax-to-GDP ratio.

Underground Shocks Ground Zero Responses

The aim of this paper is twofold. First, new annual data on Italian irregular sector for the period 1980-1991 are reconstructed. These data are compatible with the available 1992-2001 official data. Second, based on this self-consistent “long” sample a time series analysis of the two sides – the underground and the regular - of the Italian GDP is performed. Results from univariate and VAR models seem to suggest that there are no connections (causal relationship, feedbacks, contemporaneous cyclical movements, common stochastic trends) between these two time series. In this sense, we could correctly refer to the Italian black sector as an “independent economy”.Underground economy; VAR models

AN IMPROVEMENT OF THE TANZI METHOD FOR THE ESTIMATION OF ITALIAN UNGERGROUND ECONOMY

This paper deals with the Tanzi method for the estimation of underground economy. The approach is discussed and modified. Refinements on the variables and on the econometric technique are proposed. The “adjusted” Tanzi method is then used to estimate the shadow economy in Italy along twenty-eight years. Despite the difficulty to obtain point estimates, interpretations of the results are nevertheless possible, trustworthy and interesting. For instance, the model detects the presence of underground economy, an expected finding. On the other hand the model shows no positive trend in the recent period. A very puzzling result, given the mainstream literature and the policymakers claims.Shadow economy, cointegration

Book-Tax Gap. An Income Horse Race

This paper presents some stylised facts about the book-tax gap, i.e. the difference between book and taxable income, of Italian corporations. This divergence is a reflection of the usage of any tax shields and any applicable credits and rebates which, in turn, implies that the concept of taxable income is elusive. Moreover overlapping fiscal policies make harder, on the one hand, firms’ tax planning and, on the other hand, policymakers’ control on the effectiveness of their manoeuvres. As for the fiscal year 2000, evidence based on data drawn from the Diecofis database shows that, as expected (why pay more?), in Italy there is a widespread and active industry set up to enable taxpayers to identify and take advantage of particular tax effects. In that year 55,201 (16% of the) firms were able to report positive book profits and to indicate non positive taxable incomes. A less expected outcome shows that the “income race” may finish in a quite different way. More than half (57%) of the uneconomic companies, ends up with positive taxable incomes (83,449 in absolute terms). A disaggregated analysis highlights that this latter share is much more lower among southern corporations and large enterprises, especially in the construction and in the hotel/restaurant services sectors. Finally, it results that industries whose firms more often declare negative taxable incomes tend to display significantly higher shares of irregular workers, as well.Corporate income tax, tax avoidance, accounting

Consumer Surveys and Reality

This paper investigates the usefulness of Italian consumer surveys as estimation and forecasting tool over the period 1982-2003. To this end, standard consumption equations are estimated and then compared, in terms of in-sample and out-of-sample predictive ability, with corresponding models which differ from them only because of the presence of the confidence indicator. Unlike mainstream literature, the present work focuses on the relationships between subjective and objective information at a less aggregate level. In particular, the overall sentiment index is divided into four sub-indices related to the opinion about the i) current, ii) future, iii) general, and iv) personal situation. In turn, the total private consumption is divided in five items. The idea behind is to check if one attitudinal measure is more or less informative than another, and if some outlay is more or less “sentiment sensitive” than another. It is shown that the qualitative information obtained from household surveys improves both the goodness- of-fit of consumption equations and their forecasting performances. It is noteworthy that these improvements are all the more evident when working on disaggregated data, i.e., linking a particular kind of consumption to a particular sub index. For instance, perceptions about the future help to explain consumption for services more than disbursement for non durable goods.Consumer sentiment; Surveys; Consumption; Time series

Consumers Sentiment and Cognitive Macroeconometrics Paradoxes and Explanations

Using data from the Business Surveys Unit of the European Commission, this paper examines how, and how accurately, people assess economic systems. As expected, respondents demonstrate to know their own situation better than the system wide one, and the past better than the future. Also, correctly, perceptions accumulate towards the long run “stationarity” of the economic stance. In contrast, the presence of a long-run bias in the “forecast” error is detected. Evidence shows that it is due to people’s tendency to judge over-pessimistically and/or to forecast over-optimistically. Finally, individuals seem to believe that their own situation may consistently drift apart from the general one. I interpret commonsense behaviors as supporting the reliability of survey data. Puzzling results are assessed in the light of cognitive economics.Beliefs, survey research, consumer sentiment, cognitive economics

The Dark, and Independent, Side of the Italian Labour Market

In many countries the shadow employment has a very high priority among policymakers. A new time series for this component of the labour market has been recently released by the Italian institute of statistics. Taken together they give the motivation and the occasion for a fresh analysis of the Italian labour market over the last two decades. The aim and the contribution of this paper is to highlight some stylised facts about the links between the two sides of the labour market, the dark and the regular. Results from “exhaustive” VAR/VEC models suggest that there are no connections (causal relationships, feedbacks, contemporaneous correlation) between these two time series. In this sense, we could correctly refer to the undeclared work as an “independent” side of the Italian labour market. I interpret these results as providing empirical support for the ineffectiveness of labour policies in converting black employment into regular one.Underground economy; VAR models; Dual labour market.

Le persone comuni fanno previsioni economiche seguendo logiche econometriche o meccanismi psicologici?

La psicologia mostra che la probabilità soggettiva associata ad eventi economici futuri viene distorta in modo sistematico, rispetto a quella oggettiva, da elementi psicologici diffusi e persistenti. Lo stesso vale per l'interpretazione retrospettiva dei fatti economici. In particolare, si possono avere giudizi troppo critici e aspettative troppo ottimistiche il che porta, di conseguenza, a commettere "errori" di previsione. In periodi di crisi, inoltre, gli psicologi sostengono che le persone tendono a fare previsioni relativamente troppo ottimistiche e a dare giudizi ancor più critici, amplificando l'incoerenza tra la lettura ex post ed ex ante della medesima situazione. La teoria psicologica suggerisce anche che le condizioni personali/future sono sistematicamente percepite più rosee rispetto a quelle generali/passate. E' evidente come questo quadro contrasti fortemente con le assunzioni standard degli economisti. L'analisi delle risposte mensilmente date nel corso di due decenni dai cittadini europei sugli andamenti passati e futuri della situazione economica personale e generale, conferma con forza la presenza delle distorsioni indicate dalla teoria della psicologia cognitiva in tutti e dieci i paesi europei analizzati.Cognitive Psychology; Expectations; Forecasting; Survey Data

A quantitative view on policymakers\u2019 goal, institutions and tax evasion

We develop a general theoretical model to compare two different policymakers both facing tax evasion. Policymakers differs in that they aim to maximize either the fiscal revenues (T) as in a social-democracy as, e.g., Sweden, or the GDP as in a capitalistic country as, e.g., the USA. Both Bureaus can manoeuvre the tax rate and the share of tax receipts spent to fight the tax evasion rather than to increase the public capital. Our model merges the indications of two distinct, and sometimes conflicting, approaches to the analysis of tax evasion in that reconciling them. We also find that the feedbacks between the private and public sector are linked to some Laffer-type relationships usually unexplored by the existing literature. As compared to capitalistic systems, then, our results show that social-democracies end up imposing higher tax rates and, possibly, more pervasive regulations. Consequently, they are likely to suffer from larger tax-evasion-to-GDP ratios. This notwithstanding, social-democracies spend relatively more to contrast tax dodgers. On the other hand, T-maximizing governments have better institutional settings and greater employment rates. Whichever the preferred target, however, no policymaker is able to erase totally the tax evasion, which may explain why this latter is so pervasive and persistent even among the richest countries

A Time-Varying Expectations Formation Mechanism

We propose an expectations formation mechanism (EFM) aimed to explain the median – hence lay – forecaster’s year-ahead inflation predictions. The EFM is a time-varying combination of long-run expectations, current inflation and uncertainty with weights naively calibrated according to inflation dynamics. Earning fixed income, in fact, the median forecaster has an aversion toward underestimation that increases with inflation. To allow for occasional – albeit unintentional – cost-minimizing calibrations, the EFM nests various forecasting rules. Data from the Michigan Survey of Consumers sustains the argued behavior and contributes to interpret some puzzling price dynamics such as the missing disinflation and reflation