Tax evasion in a unionised economy
In a unionised labour market, a substitution of a payroll for an income tax will not alter employment if tax obligations are fulfilled. However, if workers or firms can evade taxes this irrelevance result might no longer apply. This will especially be the case if the fine for tax evasion depends on undeclared income or on wage payments or if withholding regulations prevent optimal evasion choices. In such instances, tax evasion opportunities make the legal incidence of taxes an important determinant of their economic incidence and employment can rise with a substitution of an income for a payroll tax.
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balanced-budget shift Business Cycle caught evading taxes choices are optimal constant labour demand constant the wedge constant wedge CORNELL UNIVERSITY LIBRARY defined degree of tax depends on undeclared economic incidence employees employment change employment decision employment effects equation evasion activities ex-ante expected utility firms and workers higher income tax impact implies incidence of taxes income tax rate interior solution requires irrelevance IZA Discussion Papers labor economics labour demand elasticity labour income legal incidence linear payroll Nash-solution non-increasing absolute risk-aversion OECD optimal degree payroll tax evasion payroll tax rate payroll to income Penalty Depends penalty for evasion penalty for tax second-order condition shift from payroll tax burden tax evasion choices tax evasion opportunities tax on labour tax reform trade union's payoff undeclared income undeclared wage payments union's first-order condition union's maximisation problem unionised labour markets University of Konstanz utilitarian trade union wedge between labour wh*w withholding regulations