The Effect of Low Corporate Tax Rate on Payroll Tax Evasion
AbstractIt is a commonly held view that the widespread policy of cutting the corporate income tax has a positive effect on taxable income through decreasing firms' incentive to hide profits. A neglected side of this policy, however, is its potential to trigger more evasion in other tax bases, such as the social security base, especially if the corporate income tax rate is low compared to the payroll rate. We develop a model in which employers and employees cooperate in declaring lower wages to the tax authorities in order to evade payroll contributions. Since wages and payroll taxes are a deductible expense for firms, a lower reported wage translates into higher corporate profits on paper and hence, shifting of tax liability out of social security into the corporate tax base. Using firm-level panel data for Bulgaria, where the problem of contribution evasion is prevalent, we find that a 1% increase in the net-of-tax-share of the corporate tax rate reduces reported wages in the economy by .21%, but leads to higher taxable incomes. An identical increase in the payroll net-of-tax-share results in a .28% rise in wages. Thus, even though the separate tax bases respond significantly to changes in the corporate tax rate, the impact on the combined tax base of wages and taxable incomes is estimated to be small.
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Bibliographic InfoPaper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp448.
Date of creation: Sep 2011
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More information through EDIRC
corporate tax; payroll tax; evasion; wage underreporting;
Find related papers by JEL classification:
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
This paper has been announced in the following NEP Reports:
- NEP-ACC-2011-12-13 (Accounting & Auditing)
- NEP-ALL-2011-12-13 (All new papers)
- NEP-IUE-2011-12-13 (Informal & Underground Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"The Elasticity of Taxable Income: Evidence and Implications,"
NBER Working Papers
7512, National Bureau of Economic Research, Inc.
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- Yaniv, Gideon, 1988. "Withholding and non-withheld tax evasion," Journal of Public Economics, Elsevier, vol. 35(2), pages 183-204, March.
- Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
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