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Minimum wage and tax evasion: theory

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  • Tonin, Mirco

Abstract

The paper builds a theoretical model to analyse the interaction between minimum wage legislation and tax evasion by employed labour. The firm and the worker agree on the amount of earnings to report to the fiscal authorities, which possess an imperfect detection technology. The introduction of the minimum wage poses a constraint on the reporting decision and induces an increase in compliance by some agents. As a consequence, a spike at the minimum wage appears in the distribution of declared earnings. Moreover, a nominally neutral fiscal regime becomes regressive, while fiscal revenues may increase. Keywords; minimum wage, tax evasion

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Bibliographic Info

Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 0711.

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Date of creation: 01 Jan 2007
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Handle: RePEc:stn:sotoec:0711

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  1. 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.
  2. Nidardo, J. & Fortin, N. & Lemieux, T., 1994. "Labor Market Institutions and the Distribution of Wages, 1973-1992: A Semiparametric Approach," Papers 93-94-15, California Irvine - School of Social Sciences.
  3. Draca, Mirko & Machin, Stephen & Van Reenen, John, 2006. "Minimum Wages and Firm Profitability," IZA Discussion Papers 1913, Institute for the Study of Labor (IZA).
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  12. Dickens, Richard & Alan Manning, 2003. "The Impact of the National Minimum Wage on the Wage Distribution in a Low-Wage Sector," Royal Economic Society Annual Conference 2003 60, Royal Economic Society.
  13. Andreoni, J. & Erard, B. & Feinstein, J., 1996. "Tax Compliance," Working papers 9610r, Wisconsin Madison - Social Systems.
  14. Erard, Brian, 1997. "Self-selection with measurement errors A microeconometric analysis of the decision to seek tax assistance and its implications for tax compliance," Journal of Econometrics, Elsevier, vol. 81(2), pages 319-356, December.
  15. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  16. Cowell, Frank A., 1985. "Tax evasion with labour income," Journal of Public Economics, Elsevier, vol. 26(1), pages 19-34, February.
  17. Alm, James & Bahl, Roy & Murray, Matthew N, 1990. "Tax Structure and Tax Compliance," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 603-13, November.
  18. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 129-162, December.
  19. Kosali Ilayperuma Simon & Robert Kaestner, 2004. "Do minimum wages affect non-wage job attributes? Evidence on fringe benefits," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 58(1), pages 52-70, October.
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