The heterogeneous effects of labor informality on VAT revenues: Evidence on a developed country |
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| Affiliation: | 1. Department of Finance, Italian Ministry of Economy and Finance, Rome (Italy). Tax Administration Research Centre, University of Exeter, United Kingdom;2. Department of Economics and Law, Sapienza University of Rome. Governance and Economics research Network, University of Vigo, Spain;1. Federal Reserve Bank of Atlanta, United States;2. Georgia State University, Georgia, United States;3. Levy Economics Institute of Bard College, United States;1. European Central Bank, DG Monetary Policy, Italy;2. Sapienza University of Rome, Italy;1. University of Naples “Parthenope” and CNR-ISSM, Naples, Italy;2. University of Naples Parthenope, Naples, Italy;3. CESifo, Munich, Germany;4. Bank of Italy, DG Economics, Statistics and Research, Rome, Italy;1. Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France;2. Institut Universitaire de France, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France;1. University of Oregon, 435 PLC, kincaid street, eugene, OR 97405, United States;2. Ohio State University, Eugene Oregon 97408, USA |
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| Abstract: | The value-added tax is spread in many countries primarily because it allows rising public revenues, but its revenue performance can be undermined in the presence of informality. We document the existence of heterogeneous effects of labor informality on VAT collection in a developed country such as Italy. By using novel regional administrative data on VAT revenues, we find that labor informality produces negative effects on total VAT collection, including VAT on production and consumption, and positive effects on VAT revenues from consumption only. We also find that the consequences of labor informality on VAT collection depend on the size of informality, by approximating an-inverted U-relation. As for Italy, we explain such heterogeneous effects with the presence of regional differences in labor market conditions. We also document that labor informality has heterogeneous effects on VAT collection when considering specific productive sectors, and the cyclical consequences of the Great Recession. |
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