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Does the Marginal Tax Rate Affect Activity in the Informal Sector?

Author

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  • Søren Leth-Petersen
  • Peer Ebbesen Skov

Abstract

This paper uses longitudinal survey data to analyze the sensitivity of informal-sector earnings to a tax reform that reduced the Danish top marginal tax rate from 63 to 56 percent. Studying a general-population representative sample, we find no evidence of informal-sector labor-supply changes caused by the reform. Looking specifically at a sample of vocationally trained males with income close to the tax threshold, we find a significant decrease in the informal-sector participation rate. The evidence shows that taxpayers' understanding of the reform correlates with the response. Finally, back-of-the-envelope calculations show the economic impact is limited.

Suggested Citation

  • Søren Leth-Petersen & Peer Ebbesen Skov, 2021. "Does the Marginal Tax Rate Affect Activity in the Informal Sector?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 77(4), pages 317-344.
    • Handle: RePEc:mhr:finarc:urn:doi:10.1628/fa-2021-0018
    DOI: 10.1628/fa-2021-0018
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    More about this item

    Keywords

    informal sector; labor supply; tax reform; panel data;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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