Informal Maxims & Maximum Informality [John J O'Loughlin] on leondumoulin.nl * FREE* shipping on qualifying offers. This substantial reverse-titled twin-book.
Table of contents
- 15 Countries With The Highest Rates Of Informal Employment
- The Consequences
- A walk in the garden
- You have been blocked
As a result, some ghosts will become adjusters. And output will increase because the firms that had been hovering just below the threshold can now produce a little more. But the VAT threshold increase has no effect on the cheats because adjusting is not the relevant alternative for them. And because only cheats and large firms are paying any tax, there will be no effect on tax revenue. Raising the VAT threshold, then, is a tax reform that has no effect on the number of informal firms or on tax revenue, but is still desirable because it results in an increase in output from firms that are fully tax compliant.
This then suggests that it would be good policy to increase the threshold until there are no more ghosts Kanbur and Keen, Pursuing this approach further leads to the conclusion that the possibilities of avoidance and evasion mean that the optimal tax threshold is higher than it would otherwise be. The implication again largely runs against the conventional mantra that tax rates should be set as low as possible to broaden the tax base.
Setting a lower threshold in an attempt to somehow include more informal firms in the tax system can be exactly the wrong policy. Almost no attention has been given to the important reality that firms nearly always face several different explicit or implicit tax regimes. For example, in India, registration and worker benefit requirements for the Factories Act kick in for manufacturing firms at specified thresholds of employment, while the central excise tax is payable above specified levels of sales.
In these more complicated situations, the simple framework used to analyze the VAT threshold increase must be expanded. Consider a situation in which a firm has two separate obligations that may have different thresholds—say VAT and income tax. There are then two possibilities.
15 Countries With The Highest Rates Of Informal Employment
If the thresholds are very close, we would expect any firm that adjusts out of one to adjust out of the other too because it never makes sense, given the fixed costs involved, to be only slightly above a threshold. If, on the other hand, the thresholds are far apart, there may well be some that adjust only out of the tax with the higher threshold.
The conventional definition of informality as nonremittance of tax applies easily in the first case, because firms will either comply with both obligations or with neither. But when the thresholds are widely separated, the possibilities are complex: It is virtually impossible to say what would constitute informality under these diverse circumstances. Assessments are even more complicated when there are more than just two tax or other obligations.
In other words, there can be no uniform notion of informality. There is a related policy question that has received almost no attention: Many would answer, we suspect, that a common threshold for multiple obligations would make life easier for a firm.
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Perhaps it would, but that is only part of the story. Other considerations nudge policymakers in exactly the opposite direction. Suppose for example that something akin to the registration requirements of the Factories Act in India were calibrated to start at the same level of sales as the VAT.
Then some firms would adjust out of both. If the Factories Act threshold were raised, firms hovering below it could now hire more workers, and make more sales. And there eventually would come a point at which they would choose to increase sales by enough to bring them above the VAT threshold, while remaining below that for the Factories Act. Raising the threshold for one obligation thus induces firms to put themselves into the other obligation.
The Consequences
As long as the revenue raised from this second obligation is positive, it can be shown that there is an overall welfare gain from differentiating thresholds in this way. Use of the term informality in relation to tax matters is not going to go away anytime soon. What is important, however, is to recognize the danger of its imprecision when invoked in the context of tax policy. The aim of tax policy aside from equity issues should be to increase social welfare, taking into account standard concerns of efficiency and equity. Slogans about reducing informality are of little help, even as some kind of intermediate objective—indeed they have proved less of an aid to clear thinking than a distraction from it.
Ravi Kanbur is T. Letters may be edited. Please send your letters to fanddletters imf. Receive emails when we post new items of interest to you. Subscribe or Modify your profile. Paying or not What informality means is rarely spelled out in tax discussions, but when economists build models informality usually seems to mean nonremittance of the full amount of tax due—that is, failure to pay.
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A walk in the garden
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