Semi-formal credit

As countries develop, many transactions that once would have occurred in the shadow economy move to formal establishments, Önanced by formal banking. A little-observed fact is that this transition does not necessarily bring the formalization of income. In particular, in countries with generous social services, an environment of semiformality can emerge, in which individuals remain registered taxpayers, to receive public beneÖts, but do not declare all of their income to tax authorities.

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As an emphasis of this point, consider the contrast between the studies of tax evasion and in- formality. Tax evasion studies primarily focus on incentives to evade and enforce. 1 By contrast, studies of informality, usually in developing countries, consider ine¢ ciencies in production, hu- man capital accumulation, and implications to industry composition. 2 A goal of this paper is to bridge some of this gap by studying the industry distribution of semiformal income.

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