TY  - JOUR
AU  - Davis,Steven J.
AU  - Henrekson,Magnus
TI  - Tax Effects on Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10509
PY  - 2004
Y2  - May 2004
UR  - http://www.nber.org/papers/w10509
L1  - http://www.nber.org/papers/w10509.pdf
N1  - Author contact info:
Steven J. Davis
Booth School of Business
The University of Chicago
5807 South Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-7312
Fax: 773/834-0733
E-Mail: Steven.Davis@ChicagoBooth.edu

Magnus Henrekson
Research Institute of Industrial Economics
P.O. Box 55665
S-102 15 Stockholm Sweden
E-Mail: Magnus.Henrekson@ifn.se
AB  - 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.
ER  -