IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Tax Effects on Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons

  • Davis, Steven J.


    (The University of Chicago Graduate School of Business)

  • Henrekson, Magnus


    (Department of Economics)

Guided by a simple theory of task assignment and time allocation, we investigate the long run response to national differences in tax rates on labor income, payrolls and consumption. The theory implies that higher tax rates reduce work time in the market sector, increase the size of the shadow economy, alter the industry mix of market activity, and twist labor demand in a way that amplifies negative effects on market work and concentrates effects on the less skilled. We also describe conditions whereby cross-country OLS regressions yield consistent estimates of the total effect of taxes, inclusive of indirect effects that work through government spending responses to tax revenues. Regressions on rich-country samples in the mid 1990s indicate that a unit standard deviation tax rate difference of 12.8 percentage points leads to 122 fewer market work hours per adult per year, a drop of 4.9 percentage points in the employment-population ratio, and a rise in the shadow economy equal to 3.8 percent of GDP. It also leads to 10 to 30 percent lower employment and value added shares in (a) retail trade and repairs, (b) eating, drinking and lodging, and (c) a broader industry group that includes wholesale and motor trade.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Our checks indicate that this address may not be valid because: 404 Not Found ( [301 Moved Permanently]--> If this is indeed the case, please notify (Martin Korpi)

Download Restriction: no

Paper provided by The Ratio Institute in its series Ratio Working Papers with number 57.

in new window

Length: 69 pages
Date of creation: 18 Nov 2004
Date of revision:
Publication status: Published in Labour Supply and Incentives to Work in Europe, Gómez-Salvador, R., Lamo, A., Petrongolo, B., Ward, M., Wasmer, E. (eds.), 2005, chapter 2, pages 44-104, Edward Elgar.
Handle: RePEc:hhs:ratioi:0057
Contact details of provider: Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
Phone: 08-441 59 00
Fax: 08-441 59 29
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. repec:tpr:qjecon:v:117:y:2002:i:4:p:1369-1413 is not listed on IDEAS
  2. Marianne Bertrand & Francis Kramarz, 2001. "Does Entry Regulation Hinder Job Creation ? Evidence from the French Retail Industry," Working Papers 2001-12, Centre de Recherche en Economie et Statistique.
  3. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Books, National Bureau of Economic Research, Inc, number caga58-1, December.
  4. Lars Ljungqvist & Thomas J. Sargent, 1998. "The European Unemployment Dilemma," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 514-550, June.
  5. Lindbeck, Assar, 1995. "Hazardous Welfare-State Dynamics," American Economic Review, American Economic Association, vol. 85(2), pages 9-15, May.
  6. Kenneth R. Troske, 1999. "Evidence On The Employer Size-Wage Premium From Worker-Establishment Matched Data," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 15-26, February.
  7. Henrekson, Magnus & Persson, Mats, 2001. "The Effects on Sick Leave of Changes in the Sickness Insurance System," Seminar Papers 697, Stockholm University, Institute for International Economic Studies.
  8. Stephen Nickell, 2004. "Employment and taxes," LSE Research Online Documents on Economics 19955, London School of Economics and Political Science, LSE Library.
  9. Persson, Torsten & Roland, Gérard & Tabellini, Guido, 1997. "Comparative Politics and Public Finance," CEPR Discussion Papers 1737, C.E.P.R. Discussion Papers.
  10. Greenwood, J. & Rogerson, R. & Wright, R., 1993. "Household Production in Real Business Cycle Thoery," RCER Working Papers 347, University of Rochester - Center for Economic Research (RCER).
  11. Torsten Persson & Guido Tabellini, 2001. "Political Institutions and Policy Outcomes: What are the Stylized Facts?," Temi di discussione (Economic working papers) 412, Bank of Italy, Economic Research and International Relations Area.
  12. Schettkat, Ronald, 2002. "Differences in US-German time-allocation: Why do Americans work longer hours than Germans?," Discussion Papers, Research Unit: Labor Market Policy and Employment FS I 02-212, Social Science Research Center Berlin (WZB).
  13. Ellen R. McGrattan & Richard Rogerson & Randall Wright, 1995. "An equilibrium model of the business cycle with household production and fiscal policy," Staff Report 191, Federal Reserve Bank of Minneapolis.
  14. repec:tpr:qjecon:v:114:y:1999:i:1:p:1-35 is not listed on IDEAS
  15. Ljungqvist, Lars & Sargent, Thomas J., 1995. "The Swedish unemployment experience," European Economic Review, Elsevier, vol. 39(5), pages 1043-1070, May.
  16. Richard Layard & Stephen Nickell, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers dp0407, Centre for Economic Performance, LSE.
  17. Stephen Machin & Alan Manning, 1992. "Minimum Wages," CEP Discussion Papers dp0080, Centre for Economic Performance, LSE.
  18. Peter Lindert, 2003. "Why The Welfare State Looks Like a Free Lunch," Working Papers 27, University of California, Davis, Department of Economics.
  19. Eisner, Robert, 1988. "Extended Accounts for National Income and Product," Journal of Economic Literature, American Economic Association, vol. 26(4), pages 1611-84, December.
  20. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, June.
  21. Olivier Blanchard, 2004. "The Economic Future of Europe," NBER Working Papers 10310, National Bureau of Economic Research, Inc.
  22. Krueger, Alan B. & Meyer, Bruce D., 2002. "Labor supply effects of social insurance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 33, pages 2327-2392 Elsevier.
  23. Edward C. Prescott, 2004. "Why Do Americans Work So Much More Than Europeans?," Levine's Bibliography 122247000000000413, UCLA Department of Economics.
  24. Sherwin Rosen, 1995. "Public Employment, Taxes and the Welfare State in Sweden," University of Chicago - George G. Stigler Center for Study of Economy and State 106, Chicago - Center for Study of Economy and State.
  25. Henrik Jacobsen Kleven & Wolfram F. Richter & Peter Birch Sørensen, . "Optimal Taxation with Household Production," EPRU Working Paper Series 99-12, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  26. Auerbach, Alan J, 1983. "Taxation, Corporate Financial Policy and the Cost of Capital," Journal of Economic Literature, American Economic Association, vol. 21(3), pages 905-40, September.
  27. Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 831-80, June.
  28. Freeman, Richard B & Schettkat, Ronald, 2001. " Marketization of Production and the US-Europe Employment Gap," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(0), pages 647-70, Special I.
  29. Schneider, Friedrich, 2002. "The Size and Development of the Shadow Economies of 22 Transition and 21 OECD Countries," IZA Discussion Papers 514, Institute for the Study of Labor (IZA).
  30. John Piggott & John Whalley, 1998. "VAT Base Broadening, Self Supply, and The Informal Sector," NBER Working Papers 6349, National Bureau of Economic Research, Inc.
  31. David E. A. Giles, 1998. "Modelling the Tax Compliance Profiles of New Zealand Firms: Evidence from Audit Records," Econometrics Working Papers 9803, Department of Economics, University of Victoria.
  32. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, vol. 88(2), pages 387-92, May.
  33. Blau, Francine D. & Kahn, Lawrence M., 1999. "Institutions and laws in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 25, pages 1399-1461 Elsevier.
  34. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1996. "Are consumption taxes really better than income taxes?," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 475-503, June.
  35. Conny Olovsson, 2004. "Why do Europeans Work so Little?," 2004 Meeting Papers 760, Society for Economic Dynamics.
  36. Steven J. Davis & Magnus Henrekson, 2000. "Wage-Setting Institutions as Industrial Policy," NBER Working Papers 7502, National Bureau of Economic Research, Inc.
  37. Sandmo, Agnar, 1990. "Tax Distortions and Household Production," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 78-90, January.
  38. Juster, F Thomas & Stafford, Frank P, 1991. "The Allocation of Time: Empirical Findings, Behavioral Models, and Problems of Measurement," Journal of Economic Literature, American Economic Association, vol. 29(2), pages 471-522, June.
  39. P. B. Sørensen, 1997. "Public finance solutions to the European unemployment problem?," Economic Policy, CEPR;CES;MSH, vol. 12(25), pages 221-264, October.
  40. Blanchard, Olivier J & Giavazzi, Francesco, 2001. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labour Markets," CEPR Discussion Papers 2713, C.E.P.R. Discussion Papers.
  41. Andrew Glyn, 2002. "Labour Market Success and Labour Market Reform: Lessons from Ireland and New Zealand," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2002-03, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
  42. repec:reg:rpubli:74 is not listed on IDEAS
  43. Boskin, Michael J., 1975. "Efficiency aspects of the differential tax treatment of market and household economic activity," Journal of Public Economics, Elsevier, vol. 4(1), pages 1-25, February.
  44. Davis, Steven J., 1997. "Sorting, learning, and mobility when jobs have scarcity value : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 46(1), pages 327-337, June.
  45. Thomas Aronsson & James R. Walker, 1997. "The Effects of Sweden's Welfare State on Labor Supply Incentives," NBER Chapters, in: The Welfare State in Transition: Reforming the Swedish Model, pages 203-266 National Bureau of Economic Research, Inc.
  46. Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," University of Chicago - George G. Stigler Center for Study of Economy and State 144, Chicago - Center for Study of Economy and State.
  47. 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.
  48. Jung, Young H. & Snow, Arthur & Trandel, Gregory A., 1994. "Tax evasion and the size of the underground economy," Journal of Public Economics, Elsevier, vol. 54(3), pages 391-402, July.
  49. Lindbeck, Assar & Nyberg, Sten & Weibull, Jörgen W., 1997. "Social Norms and Economic Incentives in the Welfare State," Working Paper Series 476, Research Institute of Industrial Economics.
  50. Filip Palda, 1998. "Evasive Ability and the Efficiency Cost of the Underground Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 31(5), pages 1118-1138, November.
  51. Gersbach, Hans & Schniewind, Achim, 2001. "Product Market Reforms and Unemployment in Europe," IZA Discussion Papers 255, Institute for the Study of Labor (IZA).
  52. Richard Rogerson, 2007. "Taxation and market work: is Scandinavia an outlier?," Economic Theory, Springer, vol. 32(1), pages 59-85, July.
  53. Phillip Cagan, 1958. "The Demand for Currency Relative to the Total Money Supply," Journal of Political Economy, University of Chicago Press, vol. 66, pages 303.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:hhs:ratioi:0057. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martin Korpi)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.