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Tax Liability and Tax Evasion in a Competitive Labor Market
Author(s) -
GOERKE LASZLO
Publication year - 2005
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2005.00207.x
Subject(s) - economics , tax incidence , evasion (ethics) , payroll tax , labour economics , tax evasion , indirect tax , tax deferral , state income tax , tax reform , microeconomics , income tax , monetary economics , gross income , market economy , public economics , immune system , immunology , biology
In a competitive labor market, a change in the legal incidence of a tax on labor will not alter employment if tax obligations are fulfilled. However, this irrelevance result may no longer apply if taxes can be evaded. In particular, a shift from payroll to income taxes will lower employment. This will be the case if workers exhibit constant absolute risk aversion, have a utility function, which is strongly separable in income and the disutility from working, and the penalty for evasion is not proportional to the amount of taxes evaded. Accordingly, tax evasion opportunities can make the legal incidence of a tax on labor an important determinant of its economic incidence.