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Session 7 a fantozzi raitano discussion_gv

Parallel session IARIW 2014

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Political cycle and reported labour 
incomes in Italy: quasi-experimental 
evidence on tax evasion 
Roberto Fantozzi and Michele Raitano 
IAIRW 2014 Conference 
Discussed by Gerlinde Verbist
Research questions 
• Have the political cycle affected self-employment 
attitudes towards correctly 
reporting their labour income? 
• Is there a pattern along the income 
distribution?
On the background… 
• Italy 
– 1996-2001: centre-left wing government 
– 2001-2005: centre-right wing government
Tax evasion in the political economy 
literature 
• Tax evasion considered a latent variable (i.e. 
relaxed enforcement of selected laws) in 
partisan models (e.g. Alesina, 1987) 
• Tax evasion not explicitly included in the 
models focussing on the relationship between 
voters, income and redistribution (e.g. Meltzer 
and Richard, 1981))
Determinants of tax evasion 
• Determinants of tax evasion broadly studied 
(see Schneider and Enste, 2000 for a review) 
– Probability of being detected (Allingham and 
Sandmo, 1972) 
– Social interactions (Fortin et al. 2004) 
– Subjective perception of the phenomena, 
behaviour of other members of the community 
(Kirchler, 2007) 
– Combination of deterrence measures and 
responsive regulation (Feld and Frey, 2007)
Tax evasion in Italy 
• Italy is characterized by a high level of tax 
evasion 
• Higher among self-employed than among 
employees (the former underreport 56% of 
their earnings according to Marino (2008)) 
• In 2008 share of hidden economy between 
16.3% and 17.5% of the GDP 
– Is this from legal and illegal activities?
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Session 7 a fantozzi raitano discussion_gv

  • 1. Political cycle and reported labour incomes in Italy: quasi-experimental evidence on tax evasion Roberto Fantozzi and Michele Raitano IAIRW 2014 Conference Discussed by Gerlinde Verbist
  • 2. Research questions • Have the political cycle affected self-employment attitudes towards correctly reporting their labour income? • Is there a pattern along the income distribution?
  • 3. On the background… • Italy – 1996-2001: centre-left wing government – 2001-2005: centre-right wing government
  • 4. Tax evasion in the political economy literature • Tax evasion considered a latent variable (i.e. relaxed enforcement of selected laws) in partisan models (e.g. Alesina, 1987) • Tax evasion not explicitly included in the models focussing on the relationship between voters, income and redistribution (e.g. Meltzer and Richard, 1981))
  • 5. Determinants of tax evasion • Determinants of tax evasion broadly studied (see Schneider and Enste, 2000 for a review) – Probability of being detected (Allingham and Sandmo, 1972) – Social interactions (Fortin et al. 2004) – Subjective perception of the phenomena, behaviour of other members of the community (Kirchler, 2007) – Combination of deterrence measures and responsive regulation (Feld and Frey, 2007)
  • 6. Tax evasion in Italy • Italy is characterized by a high level of tax evasion • Higher among self-employed than among employees (the former underreport 56% of their earnings according to Marino (2008)) • In 2008 share of hidden economy between 16.3% and 17.5% of the GDP – Is this from legal and illegal activities?
  • 8. How can the political cycle affect individual tax compliance? • Audit frequency, penalty sizes, tax rates (Allingham and Sandmo, 1972) • Tax morale, social norms, perceptions on the opportunity to evade incomes (Kirchler, 2007) • However, very limited studies on the links between political cycle and tax compliance. • No studies for Italy!
  • 10. Political cycle in Italy, II • 1996-2001: centre-left coalition – Success among voters who considered as priorities the fight against tax evasion and public corruption, the defence of the welfare state and the public services • 2001-2005: centre-right coalition – Success among voters who considered as priorities lowering taxes, increasing labour market flexibility and fighting against crime and illegal immigration – Relatively higher support among self-employed
  • 12. Data • IT-SILC 2005 linked with administrative data on individual working history – Gross income – Labour market experience – Region of residence – Gender, education, age… • To avoid endogenous choice, people moving from employment to self-employed have been excluded
  • 14. Empirical strategy • Do relative earnings between self-employed and employees change when the coalition changes? – Difference in difference strategy • Is the size of the estimated coefficient constant along the income distribution? – Quantile fixed effect methodology (Canay, 2011)
  • 15. Empirical results Trend of mean gross yearly earnings: widening gap between employees and self-employed since 2001
  • 16. Difference in Difference • Do relative earnings between self-employed and employees change when the coalition in charge of government changes? – Shock: 2001 (change of coalition) – Treatment group: self-employed – Control group: employees – Controlling for busyness cycle, common and specific time trends The change in self-employment earnings when the centre-right coalition went to rule
  • 17. Difference in Difference results I Estimated coefficient γ of the interaction between self-employed dummy and post-shock dummy Self-employed earnings reduced by around 6.5-7.9%
  • 18. Difference in Difference results II Estimated coefficient γ. Specific trends model, Fixed effect model on subsample of non-movers Specific time trend for worker category: self-employed earnings reduced by around 12.6%
  • 19. Quantile fixed effect • How the coefficients of the interaction terms between self-employment and the post shock dummy move along the income distribution
  • 20. Quantile fixed effect Results • Estimated coefficients of the interaction terms between self-employment and the post shock dummy (γ) move along the distribution • Coefficients negative and significant in all deciles, but their size reduces along the distribution, especially up to the median
  • 21. Discussion I • Observed effects as a consequences of the measures introduced by the different coalitions (i.e. is there empirical evidence on the effects of tax amnesties or audit scheme?) or the result of a more general perception and political support not-against tax evasion?
  • 22. Discussion II • The higher flexibility since the 2000s should have produced a larger number of “self-employed contracts” with lower average earnigns – Are the recent and new “self-employed” (e.g. on temporary contract or “false” self-employed) included in your sample? – How do you explain larger decrease in the coefficient when you introduce the specific time trend dummies? It does not capture the above phenomenon…. • Endogeneity in quantile regressions?