Profit Tax Evasion With Collusion Between Employers and Employees, and Wage Inequality: A General Equilibrium Analysis

ABSTRACT In this paper, in a general equilibrium setting, we address the issue of profit tax evasion with collusion between employers and employees in a given number of homogeneous Cournot oligopoly with the consensus of unskilled workers, wherein the profit‐maximizing firm is over‐reporting the wage payment to evade the corporate profit tax and the unskilled labor receives a part of cost‐saving ex ante. We show that under a given number of manufacturing firms, the firms evading tax by over‐reporting production cost will worsen wage inequality and income inequality between production factors. In the analysis of the collusion between employers and employees, we find that a higher ratio of wage‐saving sharing will strengthen the negative effect of the manufacturing firm evading tax on wage inequality and income inequality among sectors, however, the negative effects within industrial sector are weakened.