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Tax Policies and Informal Employment: The Asian Experience
Author(s) -
Ihrig Jane,
Moe Karine S.
Publication year - 2001
Publication title -
asian economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.345
H-Index - 28
eISSN - 1467-8381
pISSN - 1351-3958
DOI - 10.1111/1467-8381.00150
Subject(s) - informal sector , enforcement , tertiary sector of the economy , labour economics , economics , manufacturing sector , service (business) , economic sector , business , economic growth , economy , political science , law
This paper develops and estimates a model linking tax policies to the size of the informal sector. Our results suggest that informal employment responds to the strength of enforcement and, to a lesser extent, to tax rates. Looking across sectors, we find service sector informal employment responds to both changes in tax rates and enforcement, while manufacturing sector informal employment responds only to enforcement. Quantitatively, changes in enforcement affect the manufacturing informal sector more than the service sector. These results are robust to various measures of informal employment and hold for other countries outside of Asia as well. Since informal employment (and hence output) is related to a country's GDP, these results suggest that policy makers should consider the effect of their policies on the size of the informal sector. JEL classification : O 17; O 53; H 26