Tax Effects on Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractGuided by a simple theory of task assignment and time allocation, we investigate the long run response to national differences in tax rates on labor income, payrolls and consumption. The theory implies that higher tax rates reduce work time in the market sector, increase the size of the shadow economy, alter the industry mix of market activity, and twist labor demand in a way that amplifies negative effects on market work and concentrates effects on the less skilled.We also describe conditions whereby cross-country OLS regressions yield unbiased estimates of the total effect of taxes, inclusive of indirect effects that work through government spending responses to tax revenues. Regressions on rich-country samples in the mid 1990s indicate that a unit standard deviation tax rate difference of 12.8 percentage points leads to 122 fewer market work hours per adult per year, a drop of 4.9 percentage points in the employment-population ratio, and a rise in the shadow economy equal to 3.8 percent of GDP. It also leads to 10 to 30 percent lower employment and value added shares in (a) retail trade and repairs, (b) eating, drinking and lodging, and (c) a broader industry group that includes wholesale and motor trade.JEL Classification: D13, H24, J22

Labour Supply and the Extensive Margin

“…This will allow us to draw implications for the the aggregate hours elasticity. Davis and Henrekson (2004) note the importance of household production in interpreting these effects. In Blundell et al (2011), we develop a life-cycle aggregation framework and apply it to the UK using a consistent series on marginal taxes, incomes, hours of work, wages and consumption for a representative sample of households.…”

Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply

“…Davis and Henrekson (2005): b ": computed using log di¤erences in annual hours per employed adult based on the slope coe¢ cient in Table 2.3 (middle panel, Sample C) and the sample means of annual hours per employed person and tax rates in Table 2.1 for the corresponding sample. The elasticity estimate can be interpreted as a compensated labor supply elasticity if government expenditure is viewed as unearned income in the aggregate.…”

Explaining Differences in Hours Worked among OECD Countries

“…Davis and Henrekson (2004) 13 OECD countries, years: 1977OECD countries, years: , 1983OECD countries, years: , 1990OECD countries, years: and 1995 A) annual w ork hours per adult, OECD; B) annual w ork hours per employed adult, OECD.…”