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Tax Evasion and the Minimum Wage

Author

Listed:
  • Anikó Bíró

    (Health and Population Lendület Research Group, Centre for Economic and Regional Studies)

  • Dániel Prinz

    (Harvard University)

  • László Sándor

    (University of Luxembourg)

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. Consistent with misreporting, the response is concentrated both spatially and by employer and the distribution of covariates around the threshold exhibits anomalies. Requiring individuals reporting to earn the minimum wage 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.

Suggested Citation

  • Anikó Bíró & Dániel Prinz & László Sándor, 2020. "Tax Evasion and the Minimum Wage," CERS-IE WORKING PAPERS 2043, Institute of Economics, Centre for Economic and Regional Studies.
    • Handle: RePEc:has:discpr:2043
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    Citations

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    Cited by:

    1. Nicolas Gavoille & Anna Zasova, 2021. "What we pay in the shadows: Labor tax evasion, minimum wage hike and employment," SSE Riga/BICEPS Research Papers 6, Baltic International Centre for Economic Policy Studies (BICEPS);Stockholm School of Economics in Riga (SSE Riga).

    More about this item

    Keywords

    minimum wage; tax evasion; audit; Hungary;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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