NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Steven J. Davis, Magnus Henrekson

NBER Working Paper No. 10509
Issued in May 2004
NBER Program(s):   EFG   LS   PE

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 unbiased 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.

download in pdf format
   (1065 K)

email paper

A non-technical summary of this paper is available in the December 2004 NBER digest.  You can sign up to receive the NBER Digest by email.

This paper is available as PDF (1065 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10509

Published: Gomez Salvador, R., A. Lamo, B. Petrongolo, M. Ward, and E. Wasmer (eds.) Labour Supply and Incentives to Work in Europe. Edward Elgar Press, 2005.

Users who downloaded this paper also downloaded these:
Prescott w10316 Why do Americans Work so Much More than Europeans?
Alesina, Glaeser, and Sacerdote Work and Leisure in the U.S. and Europe: Why So Different?
Romer and Romer w13264 The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks
Alesina, Glaeser, and Sacerdote w11278 Work and Leisure in the U.S. and Europe: Why So Different?
Goolsbee w6333 What Happens When You Tax the Rich? Evidence from Executive Compensation
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us