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

LABOUR SUPPLY AND INCENTIVES TO WORK IN EUROPE, R. Gómez-Salvador et al. eds., Cheltenham, UK: Edward Elgar, 2005

69 Pages Posted: 5 Jul 2007

See all articles by Steven J. Davis

Steven J. Davis

University of Chicago; National Bureau of Economic Research (NBER); Hoover Institution

Magnus Henrekson

Research Institute of Industrial Economics (IFN)

Multiple version iconThere are 2 versions of this paper

Abstract

Guided 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 consistent 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.

Keywords: Taxes and work activity, time allocation, non-market production, industry mix, shadow economy

JEL Classification: D13, H24, J22

Suggested Citation

Davis, Steven J. and Henrekson, Magnus, Tax Effects on Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons. LABOUR SUPPLY AND INCENTIVES TO WORK IN EUROPE, R. Gómez-Salvador et al. eds., Cheltenham, UK: Edward Elgar, 2005, Available at SSRN: https://ssrn.com/abstract=998220

Steven J. Davis (Contact Author)

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7312 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hoover Institution

434 Galvez Mall
Stanford University
Stanford, CA 94305-6010
United States
773 251 1795 (Phone)

Magnus Henrekson

Research Institute of Industrial Economics (IFN) ( email )

P.O. Box 55665
Grevgatan 34
Stockholm, SE-10215
Sweden
+46-8-6654502 (Phone)
+46-8-6654599 (Fax)

HOME PAGE: http://www.ifn.se/mh

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
221
Abstract Views
4,508
Rank
185,923
PlumX Metrics