Taxes and Market Time
By Arnold Kling
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.
…our evidence strongly suggests that labor and consumption taxes operate with powerful effect on several margins: substitution between legal and underground activity, substitution between home and market production, the mix of market production activity, and the composition of market expenditures. Prescott’s model collapses these response margins to a single choice between work and leisure.
A number of other economics blogs have pointed to this study. I first saw it referred to by Steve Antler.
For Discussion. I think of lawnmowing, child care, and fast food as industries that would be sensitive to tax rates, because if tax rates are high enough you would do those jobs yourself tax-free rather than earn taxable income to pay someone else to do them. What other industries would be most sensitive to tax rates?