Minimum wage and tax evasion: theory and evidence
Minimum wage and tax evasion: theory and evidence
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.
minimum wage, tax evasion, spike
1635-1651
Tonin, Mirco
2929ca00-ca4e-4eb3-bf2b-a5d233b80253
December 2011
Tonin, Mirco
2929ca00-ca4e-4eb3-bf2b-a5d233b80253
Tonin, Mirco
(2011)
Minimum wage and tax evasion: theory and evidence.
[in special issue: Special Issue: International Seminar for Public Economics on Normative Tax Theory]
Journal of Public Economics, 95 (11-12), .
(doi:10.1016/j.jpubeco.2011.04.005).
Abstract
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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e-pub ahead of print date: 7 May 2011
Published date: December 2011
Keywords:
minimum wage, tax evasion, spike
Organisations:
Social Sciences
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Local EPrints ID: 186031
URI: http://eprints.soton.ac.uk/id/eprint/186031
PURE UUID: ce33c80d-d680-4eef-94b9-3a1fd4cce558
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Date deposited: 11 May 2011 17:19
Last modified: 14 Mar 2024 03:17
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Mirco Tonin
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