Tax Evasion and the Minimum Wage: Evidence from Hungary

Citation:

Bíró, Anikó, Dániel Prinz, and László Sándor. Working Paper. “Tax Evasion and the Minimum Wage: Evidence from Hungary”.
Paper3.63 MB
Slides4.07 MB

Abstract:

Exploiting a change in reporting defaults and the implied audit threat in Hungary, we demonstrate that a substantial portion of employees and the self-employed reporting to earn the minimum wage have much higher earnings in reality. This can be seen from their sharp but temporary jump to the new reporting default, a twofold increase in reported earnings, which quickly dissipates as enforcement does not follow. Misreporting is also consistent with the response concentrated both spatially and by employer, as well as with the anomalous covariate distributions around the threshold. Requiring these individuals to pay higher taxes or ask for explicit exceptions increases reported earnings for some and decreases formal employment for others, suggesting a trade-off for taxation. We formalize the empirical findings in a model of minimum wage taxation where earnings underreporting around the minimum wage would justify a move towards higher taxation of those earnings, more aligned with a prevalent international practice. 

Last updated on 09/25/2020