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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. Dinardo, J. & Fortin, N.M. & Lemieux, T., 1994. "Labor Market Institutions and the Distribution of Wages, 1973-1992: a Semiparametric Approach," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 9406, Universite de Montreal, Departement de sciences economiques.
  2. 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.
  3. Ann-Sofie Kolm & S�Ren Bo Nielsen, 2008. "Under-reporting of Income and Labor Market Performance," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 10(2), pages 195-217, 04.
  4. 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, Elsevier, vol. 81(2), pages 319-356, December.
  5. repec:att:wimass:9610 is not listed on IDEAS
  6. Tito Boeri & Pietro Garibaldi, 2005. "Shadow Sorting," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER International Seminar on Macroeconomics 2005, pages 125-163 National Bureau of Economic Research, Inc.
  7. Klepper, Steven & Nagin, Daniel, 1989. "The Anatomy of Tax Evasion," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 5(1), pages 1-24, Spring.
  8. Mirko Draca & Stephen Machin & John Van Reenen, 2006. "Minimum wages and firm profitability," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 774, London School of Economics and Political Science, LSE Library.
  9. Acemoglu, Daron, 2001. "Good Jobs versus Bad Jobs," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 19(1), pages 1-21, January.
  10. Sandmo, Agnar, 1981. "Income tax evasion, labour supply, and the equity--efficiency tradeoff," Journal of Public Economics, Elsevier, Elsevier, vol. 16(3), pages 265-288, December.
  11. Andreoni, J. & Erard, B. & Feinstein, J., 1996. "Tax Compliance," Working papers, Wisconsin Madison - Social Systems 9610r, Wisconsin Madison - Social Systems.
  12. Joel Slemrod & Shlomo Yitzhaki, 2000. "Tax Avoidance, Evasion, and Administration," NBER Working Papers 7473, National Bureau of Economic Research, Inc.
  13. 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, Royal Economic Society 60, Royal Economic Society.
  14. 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.
  15. 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, Elsevier, vol. 45(1), pages 129-162, December.
  16. Fugazza, Marco & Jacques, Jean-Francois, 2004. "Labor market institutions, taxation and the underground economy," Journal of Public Economics, Elsevier, Elsevier, vol. 88(1-2), pages 395-418, January.
  17. Naomi E. Feldman & Joel Slemrod, 2007. "Estimating tax noncompliance with evidence from unaudited tax returns," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 117(518), pages 327-352, 03.
  18. Brown, Charles, 1999. "Minimum wages, employment, and the distribution of income," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 32, pages 2101-2163 Elsevier.
  19. Cowell, Frank A., 1985. "Tax evasion with labour income," Journal of Public Economics, Elsevier, Elsevier, vol. 26(1), pages 19-34, February.
  20. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 38(1), pages 77-114, March.
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