The Impact of Tax Policy on Undeclared Work

Abstract

According to the economic theory of tax evasion, the extent of undeclared work could also – in addition to deterrence – be affected by either tax policies or tax morale. The possibility has already been mentioned that the German tax reform act of 2000, which has been implemented in stages up until 2005, could have affected the pattern of undeclared activities between 2001 and 2004. And when the tax reform was fully implemented in 2005, income taxes in Germany had been cut considerably from a marginal tax rate going from 22.9% for the lowest taxable income bracket to 51% for the highest income bracket in the year 2000 to 15% and 42% respectively. Taxpayers have to pay the solidarity surcharge and social security contributions, both of which increase the tax burden on labor income, but nevertheless the overall reduction in income taxes has been considerable in the recent past.