Minimum Wage and Related
Policy Instruments to Reduce
Undeclared Work
Mirco Tonin
University of Southampton
Outline
Discuss the role of policies establishing some
sort of “minimal thresholds” in reducing
undeclared work and their application in
Hungary
1. The minimum wage as a tax enforcement device:
Hungary 2001
2. Contrasting underreporting by employees: the Bulgarian
minimum social insurance thresholds
3. Contrasting underreporting by self-employed, SME,
professional: the Italian “Business Sector Analysis”
Minimum Wage and Tax Evasion:
Hungary 2001
• MW is smallest possible amount to be
declared to remain in the formal economy
• Previous research (Tonin, 2007) shows
that 2001 hike was effective in reducing
underreporting of earnings by employees
in the formal economy
• Risk: some workers move from the formal
economy into black economy or inactivity
Sharpening the tool
A single statutory MW is a blunt
instrument to fight underreporting!
MW can be sharpened by differentiation
along dimensions related to productivity
• Hungary: differentiation according to job
educational requirement
• Bulgaria: differentiation along sectoral and
occupational dimensions
The Bulgarian Case
Problem:
• massive underreporting of labour compensation
Two changes in labour regulation in 2003:
• compulsory registration of all concluded,
amended, or terminated contracts
• introduction of minimum social security thresholds
Minimum Social Security Thresholds
Varying according to:
• occupational group (9 categories, e.g.
administrative staff / service workers and sale workers)
• sector (48 in 2003, 73 at present, e.g. processing and
preserving of fruit and vegetables / manufacture of dairy
products)
Potentially, 657 different MSIT
MINIMUM: 180 leva per month (statutory minimum wage)
MAXIMUM: 851 leva per month (management in manufacture of coke, refined
petroleum products and nuclear fuel)
Minimum Social Security Thresholds (2)
• Negotiated each year with social partners (in
2005 for 48 out of 68 sectors)
• If no agreement, fixed administratively
• MSITs negotiated with social partners
usually become sectoral minimum wages
through extension of collective agreements
• No systematic evaluation, but apparently
successful in reducing underreporting
Conflict of Interest
Recent Proposal by Bulgarian Industrial
Association:
• Workers liable to a fine in case of
underreporting
• Exemption from the fine and additional
protection against unfair dismissal if worker
denounces illegal payments to authorities
The Italian Case
Problem:
• massive underreporting by small and medium
enterprises, self-employed, and professionals
Introduction in 1998 of “Business Sector
Analysis” (Studi di Settore)
• methodology to estimate revenues and
compensations
• hybrid between auditing selection mechanism and
presumptive taxation
Main Features
Elaboration of sector-specific BSA:
• 45 in 1998, 200 now, e.g. “Retail sale of flowers,
plants and seeds via permanent or mobile stalls”/ “Tour
guide activities”/ “Dentistry”
• participation of trade associations
• publication of results
• regular updating
Procedure
1. Estimation of revenues (based on sector/
organizational structure/ reference market/ business model/
geographical location/ structural and accounting variables)
2. Declaration :
• Accounting Revenues > Estimate?
• Taxpayer voluntarily “adjust” to estimate?
If yes, taxpayer is “consistent”, if no “inconsistent”
3. Auditing : “inconsistent” taxpayer
• higher probability of an auditing
• reversal of burden of proof
Estimation of Revenues - Macro
A. Data Collection - survey of the population of
interest to collect structural and accounting
data (e.g. for retail sale of flowers approx. 100
questions)
B. Identification of Sectoral and Geographical
Clusters (e.g. for retail sale of flowers, 8 clusters “flower retailers with kiosk operating nearby
cemeteries”)
C. Estimation of Revenue Function – regression
analysis on selected sample: relationship
between revenues and structural and
accounting variables
Example: “Retail sale of flowers, plants
and seeds via permanent or mobile stalls”
6 sectoral clusters (4 displayed)
2 geographical clusters
10 “independent” variables
Declaration
• Applied to self-employed, professionals,
SME with revenues below EUR 5m + other
causes of exclusion (approx. 4m firms)
• Taxpayer fill in data and knows the amount
of estimated revenues
• If accounting revenues are lower, can decide
to adjust declaration to match estimate (a 3%
penalty applies for deviations above 10%)
• If taxpayer decide NOT to do so, classified
as “inconsistent”
Auditing
“Inconsistent” taxpayers subject to:
• higher probability of auditing
• reversal of burden of proof – taxpayer has to
document the reasons why revenues are below estimate
Examples of acceptable reasons:
• illness or maternity
• reduced business due to road
reconstruction
• economic marginality of business activity
Assessment
Impact at declaration (2004):
•
•
•
•
69% “naturally consistent”
15% “consistent by adjustment” => +3bn EUR
16% “inconsistent”
evidence of BSA being more effective when
recently updated and probability of auditing higher
Impact on bookkeeping
• not systematically assessed, but most likely
important once BSA established
The Hungarian Experience
Higher probability of an audit if social security
contributions paid on a base below twice the
minimum wage
• mixture of the Bulgarian and Italian systems
but much more limited and undifferentiated
• possible to move toward a better targeted
system?
Conclusions
• “minimal thresholds” can play a role in
reducing underreporting by those in the
grey economy
• need to target them to avoid encouraging
black economy or inactivity
• informational requirements (and
legitimacy) calls for the active involvement
of social partners