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Tax Evasion, Minimum Wage Non-Compliance and Informality

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  • Basu, Arnab K.

    ()
    (Cornell University)

  • Chau, Nancy

    ()
    (Cornell University)

  • Siddique, Zahra

    ()
    (University of Reading)

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.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6228.

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Length: 51 pages
Date of creation: Dec 2011
Date of revision:
Publication status: published in: Research in Labor Economics, 2012, 34, 1-53
Handle: RePEc:iza:izadps:dp6228

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

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  1. Straub, Stéphane, 2005. "Informal sector: The credit market channel," Journal of Development Economics, Elsevier, vol. 78(2), pages 299-321, December.
  2. Basu, Arnab K & Chau, Nancy H & Kanbur, Ravi, 2011. "Contractual Dualism, Market Power and Informality," CEPR Discussion Papers 8485, C.E.P.R. Discussion Papers.
  3. Rita Almeida & Pedro Carneiro, 2011. "Enforcement of labor regulation and informality," CeMMAP working papers CWP29/11, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  4. Fugazza, Marco & Jacques, Jean-Francois, 2004. "Labor market institutions, taxation and the underground economy," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 395-418, January.
  5. James Heckman & Carmen Pages, 2003. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Working Papers 10129, National Bureau of Economic Research, Inc.
  6. Lemos, Sara, 2009. "Minimum wage effects in a developing country," Labour Economics, Elsevier, vol. 16(2), pages 224-237, April.
  7. Gindling, T.H. & Terrell, Katherine, 2008. "Minimum Wages, Globalization, and Poverty in Honduras," Working Paper Series RP2008/23, World Institute for Development Economic Research (UNU-WIDER).
  8. Tonin, Mirco, 2011. "Minimum wage and tax evasion: Theory and evidence," Journal of Public Economics, Elsevier, vol. 95(11), pages 1635-1651.
  9. James J. Heckman & Carmen Pagés, 2004. "Introduction to "Law and Employment: Lessons from Latin American and the Caribbean"," NBER Chapters, in: Law and Employment: Lessons from Latin America and the Caribbean, pages 1-108 National Bureau of Economic Research, Inc.
  10. Albrecht, James & Navarro, Lucas & Vroman, Susan, 2006. "The Effects of Labor Market Policies in an Economy with an Informal Sector," IZA Discussion Papers 2141, Institute for the Study of Labor (IZA).
  11. Alberto Chong & Jose Galdo & Jaime Saavedra, 2008. "Informality and productivity in the labor market in Peru," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 11(4), pages 229-245.
  12. Gindling, T. H. & Terrell, Katherine, 1995. "The nature of minimum wages and their effectiveness as a wage floor in Costa Rica, 1976-1991," World Development, Elsevier, vol. 23(8), pages 1439-1458, August.
  13. Basu, Arnab K & Chau, Nancy H & Kanbur, Ravi, 2005. "Turning a Blind Eye: Costly Enforcement, Credible Commitment and Minimum Wage Laws," CEPR Discussion Papers 5107, C.E.P.R. Discussion Papers.
  14. Sara lemos, 2004. "The Effects of the Minimum Wage in the Formal and Informal Sectors in Brazil," Discussion Papers in Economics 04/8, Department of Economics, University of Leicester.
  15. Aureo de Paula & Jose A. Scheinkman, 2009. "Value Added Taxes, Chain Effects and Informality," PIER Working Paper Archive 09-030, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  16. Jonasson, Erik, 2010. "Government Effectiveness and Regional Variation in Informal Employment," Working Papers 2010:13, Lund University, Department of Economics, revised 31 Mar 2011.
  17. Fields, Gary S., 1975. "Rural-urban migration, urban unemployment and underemployment, and job-search activity in LDCs," Journal of Development Economics, Elsevier, vol. 2(2), pages 165-187, June.
  18. Strobl, Eric & Walsh, Frank, 2003. "Minimum Wages and Compliance: The Case of Trinidad and Tobago," Economic Development and Cultural Change, University of Chicago Press, vol. 51(2), pages 427-50, January.
  19. Frank A. Cowell, 1990. "Cheating the Government: The Economics of Evasion," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262532484, December.
  20. Tommaso Gabrieli & Antonio F. Galvao, Jr. & Antonio F. Galvao, Jr., 2010. "Who Benefits from Reducing the Cost of Formality? Quantile Regression Discontinuity Analysis," Real Estate & Planning Working Papers rep-wp2010-11, Henley Business School, Reading University.
  21. Jaime Saavedra & Alberto Chong, 1999. "Structural reform, institutions and earnings: Evidence from the formal and informal sectors in urban Peru," Journal of Development Studies, Taylor & Francis Journals, vol. 35(4), pages 95-116.
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