Abstract
Using different quantitative variables together with the various interview accounts, this chapter shows that Paraguay’s economy is experiencing a formalisation process and that this formalisation surge cannot be explained by economic growth alone. It argues that the implementation of the deductible-personal income tax in 2012 led to a “change in culture” of market participants. This “change in culture” relates to a formalisation of market transactions, illustrated by a surge in officially documented purchases and rising value added- and firms’ corporate income tax contributions. It thus shows how the Paraguayan tax system nudges the final consumer to assists authorities in the formalising process.
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Notes
- 1.
The VAT compliance gap is estimated using potential VAT collection and actual collection. Potential collection is defined as the summation of actual collection and the extended compliance gap. The latter is the sum of the payment gap (late payments and default) and the voluntary or involuntary compliance gap (evasion, avoidance, and crime). It is calculated by national account data of either household consumption or the gross value of production and intermediate consumption, minus tax expenses, which yields the theoretical tax base. The theoretical tax base times the effective tax rate gives the potential collection figure. Thus, the corresponding compliance gap is the difference between the potential collection and actual collection (see: Pecho and Jorratt 2016).
- 2.
The figures of the 2010 household survey data correspond to a total of 7857 observations gathered throughout the country and the responses for the 2018 data to 6650 observations. The percentages are geographically weighted.
- 3.
The country-level informality data is based on Medina and Schneider’s (2017) informality estimates.
- 4.
Soybean net exports accumulated to 34%, corn net exports to 4%, and beef net exports to 14% of total net exports (Atlas 2017).
- 5.
Dr Dionisio Borda was Paraguay’s finance minister who implemented the 2004 reform.
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Richter, J. (2019). A Formalising Economy. In: Formalisation Through Taxation. Palgrave Pivot, Cham. https://doi.org/10.1007/978-3-030-29282-9_5
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DOI: https://doi.org/10.1007/978-3-030-29282-9_5
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