Tax Evasion, Minimum Wage Non-Compliance and Informality

51 Pages Posted: 31 Dec 2011

See all articles by Arnab K. Basu

Arnab K. Basu

College of William and Mary - Department of Economics

Nancy H. Chau

Cornell University - School of Applied Economics and Management; IZA Institute of Labor Economics

Zahra Siddique

University of Reading; IZA Institute of Labor Economics

Abstract

We study the impact of tax and minimum wage reforms on the incidence of informality. To gauge the incidence of informality, we use measures of the extent of tax evasion, the extent of minimum wage non-compliance, and the size of the informal workforce. Our approach allows us to examine (i) the distinction between determinants of firm-level reported wage distribution and actual wage distribution, (ii) the complementarity of tax and minimum wage enforcement, (iii) the impact that a minimum wage reform has on tax and minimum wage compliance, and (iv) the impact that a tax policy reform has on tax and minimum wage compliance. We conclude with the design of optimal minimum wage and tax policies (even in the complete absence of minimum wage enforcement). We do so based on two objectives derived from popular concerns associated with an unchecked expansion of informality: tax revenue maximization, and poverty alleviation among workers.

Keywords: tax evasion, minimum wage reform, flat tax reform, poverty, informality

JEL Classification: J3, J6, O17

Suggested Citation

Basu, Arnab K. and Chau, Nancy H. and Siddique, Zahra, Tax Evasion, Minimum Wage Non-Compliance and Informality. IZA Discussion Paper No. 6228. Available at SSRN: https://ssrn.com/abstract=1977814

Arnab K. Basu (Contact Author)

College of William and Mary - Department of Economics ( email )

Williamsburg, VA 23187-8795
United States
757-221-1318 (Phone)
757-221-1175 (Fax)

HOME PAGE: http://faculty.wm.edu/akbasu/

Nancy H. Chau

Cornell University - School of Applied Economics and Management ( email )

Ithaca, NY 14853
United States
607-255-4463 (Phone)
607-255-9984 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Zahra Siddique

University of Reading ( email )

Whiteknights
Reading, Berkshire RG6 6AH
United Kingdom

IZA Institute of Labor Economics ( email )

Schaumburg Lippe Str. 5-9
Bonn, 53113
Germany

HOME PAGE: http://www.iza.org/profile?key=4394

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