The Effect of Taxation on Informal Employment: Evidence from the Russian Flat Tax Reform

39 Pages Posted: 18 Jan 2012

See all articles by Fabian Slonimczyk

Fabian Slonimczyk

National Research University Higher School of Economics

Date Written: November 29, 2011

Abstract

The 2001 Russian tax reform reduced average tax rates for the personal income tax and the payroll or social tax. It also made the tax structure more regressive. Because individuals in the lower income bracket were for the most part not affected, it is possible to estimate the effects of the reform using a differences-in-differences approach. I study the effect of the reform on informal employment. Informality is defined using information on employment registration and self-employment. Applying parametric and semi-parametric techniques, I find evidence that the tax reform led to a significant reduction in the fraction of informal employees. Among the different forms of informality I study, the reform seems to have had the strongest effect on the prevalence of informal irregular activities. I also document stronger effects on individuals who benefited from the largest reductions in tax rates. The strong response to the tax reform is consistent with the emerging consensus in the literature on taxation, that changes to the tax system lead to significant behavioral responses, although not necessarily in the form of a reduced labor supply.

Keywords: informal sector, entrepreneurship, tax reform, differences-in-differences, transition, Russia

JEL Classification: H24, J3, O17, P2

Suggested Citation

Slonimczyk, Fabian, The Effect of Taxation on Informal Employment: Evidence from the Russian Flat Tax Reform (November 29, 2011). Research in Labor Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1986744

Fabian Slonimczyk (Contact Author)

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

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