Does the Marginal Tax Rate Affect Activity in the Informal Sector?

Søren Leth-Petersen and Peer Skov

FinanzArchiv: Public Finance Analysis, 2021, vol. 77, issue 4, 317-344

Abstract: This paper uses longitudinal survey data to analyze the sensitivity of informal-sector earnings to a tax reform that reduced the Danish top marginal tax rate from 63 to 56 percent. Studying a general-population representative sample, we find no evidence of informal-sector labor-supply changes caused by the reform. Looking specifically at a sample of vocationally trained males with income close to the tax threshold, we find a significant decrease in the informal-sector participation rate. The evidence shows that taxpayers' understanding of the reform correlates with the response. Finally, back-of-the-envelope calculations show the economic impact is limited.

Keywords: informal sector; labor supply; tax reform; panel data (search for similar items in EconPapers)
JEL-codes: H24 H26 H31 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1628/fa-2021-0018

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