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Tax Liability and Tax Evasion in a Competitive Labor Market

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  • LASZLO GOERKE

Abstract

In a competitive labor market, a change in the legal incidence of a tax on labor will not alter employment if tax obligations are fulfilled. However, this irrelevance result may no longer apply if taxes can be evaded. In particular, a shift from payroll to income taxes will lower employment. This will be the case if workers exhibit constant absolute risk aversion, have a utility function, which is strongly separable in income and the disutility from working, and the penalty for evasion is not proportional to the amount of taxes evaded. Accordingly, tax evasion opportunities can make the legal incidence of a tax on labor an important determinant of its economic incidence.

Suggested Citation

  • Laszlo Goerke, 2005. "Tax Liability and Tax Evasion in a Competitive Labor Market," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(2), pages 347-359, May.
    • Handle: RePEc:bla:jpbect:v:7:y:2005:i:2:p:347-359
    DOI: 10.1111/j.1467-9779.2005.00207.x
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    References listed on IDEAS

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    1. Timo Tyrväinen, 1995. "Real Wage Resistance and Unemployment: Multivariate Analysis of Cointegrating Relations in 10 OECD Countries," OECD Jobs Study Working Papers 10, OECD Publishing.
    2. repec:zbw:bofrdp:1995_012 is not listed on IDEAS
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