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Minimum Wage and Tax Evasion: Theory and Evidence

  • Tonin, Mirco

    ()

    (Free University of Bozen/Bolzano)

This paper examines the interaction between minimum wage legislation and tax evasion by employed labor. I develop a model in which firms and workers may agree to report less than the true amount of earnings to the fiscal authorities. I show that introducing a minimum wage creates a spike in the distribution of declared earnings and induces higher compliance by some agents, thus reducing their disposable income. The comparison of food consumption and of the consumption-income gap before and after the massive minimum wage hike that took place in Hungary in 2001 reveals that households who appeared to benefit from the hike actually experienced a drop compared to similar but unaffected households, thus supporting the prediction of the theory.

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File URL: http://ftp.iza.org/dp5660.pdf
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5660.

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Length: 49 pages
Date of creation: Apr 2011
Date of revision:
Publication status: published in: Journal of Public Economics, 2011, 95 (11-12), 1635-1651
Handle: RePEc:iza:izadps:dp5660
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