Informal employment: does the tax regime affect professional income?

Abstract

Informal employment is one of the most demanded economic issues in both developed and developing countries. The experiment on the introduction of a professional income tax, which started in Russia in 2019, had a certain positive impact on financial and economic indicators, including tax deductions. However, the question of the actual impact of the tax regime on the number of people employed in the informal sector is still open. The usual comparisons of statistical data do not allow us to speak unequivocally about the impact of a new tax regime on informal employment in Russia. The study purpose is to assess the impact of the professional income tax on the informal employment using econometric methods. One of the quantitative methods of policy assessment, the “difference-in-differences” method, was chosen as the main research method. The introduction of the regime in Russian regions at different times allows us to apply this method. Such estimates are not yet available in domestic works. The information base was Rosstat data on employment in the informal sector in the context of 82 regions for 2019–2020. A regression model with fixed effects was evaluated, taking into account the effects of time. The evaluation results showed that the tax introduction variable turned out to be statistically insignificant. Thus, we cannot say that it was the professional income tax that had a decreasing or increasing effect on the share of people employed in the informal sector. Data on the number of people employed in the informal sector in subsequent years are multidirectional, which indirectly also confirms the difficulty of an unambiguous answer to the question of the impact of the tax regime on employment in the informal sector, which includes the self-employed.

Keywords

• informal sector employment
• self-employment
• policy assessment
• tax experiment
• “difference-in-differences” method
• russian regions