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Unreported employment

Unreported employment. Scharle Ágota Finance Ministry 7 May 2008 Budapest . Overview. forms of avoiding wage taxes underlying causes: general and transitional consequences: good and bad size: data sources and measurement the case of Hungary strategies to fight it.

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Unreported employment

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  1. Unreported employment Scharle Ágota Finance Ministry 7 May 2008Budapest

  2. Overview • forms of avoiding wage taxes • underlying causes: general and transitional • consequences: good and bad • size: data sources and measurement • the case of Hungary • strategies to fight it

  3. Forms of evading tax on wages • Unreported employment at private householdsat firms • partially (ssc or PIT) reported employment • regular work reported as casual • employee reported as self-employed • reported employment, underreported wage/hoursreporting the minimum wage or lessreporting above the minimum but below actual wage • + tax avoidance: lunch coupons, taking out income as dividends, etc.

  4. Rational (utility) and behavioural explanations • Benefits of tax evasion > costs of evasion benefits= higher income costs = risk of getting caught * fine + direct cost of evasion + moral cost • Behaviour- reciprocity (bureaucracy, expenditure)- conditional compliance (as my neighb.)- fairness (redistribution)

  5. Underlying causes • high costs of operation (admin + taxes and social security contributions) • high entry costs (admin and financial) • transitional:social perception of cheating: ambiguous low trust in governmentlow efficiency of govmtweak surveillance misperceptions (own position, level of evasion, structure of exp.)

  6. Consequences: bad • government deficit • balance of social security funds • fairness in redistribution • old age poverty • work security and employment protection • innovative potential (see Baumol 1990)

  7. Consequences: good • may dampen negative effect of overregulation- redistribution- output

  8. Data sources and measurement • Opinion surveys- direct and indirect questions • Discrepancy analysis- turnover: goods/cash (currency) - production: output/electricity consumption- employment: admin/hhold survey • Field work

  9. The case of Hungary 1 • public opinion holds that - tax evasion is wide-spread and large- most minimum-wage earners are evadors • minimum-wage used as a means of whitening • exactly how large and who are involved- employed but not paying ssc- minimum wage earners

  10. The case of Hungary 2 Unreported (black) employment = CSO Labour force survey (MEF/LFS): total employment - Pension fund data (ONYF): reported (registered) employment Minimum wage earners = Reported taxable income corrected for days in employment ≤ minimum wage based on ONYF data, annual average

  11. Data sources • LFS • Quarterly data, population aged 15-74 • about 60 thd observations • employment as in ILO definition • age, sex, employment, occupation, place of residance, etc. • Pension data [ONYF] • representative sample of population • about 150 thd people aged 15-74 • paid pension contribution on some wage earnings • age, sex, occupation (only for employees), region Both are panels for the years 2000-2004

  12. Data sources: defining total employment • LFS • Average of quarterly figures • 6 categories of employment: • employee (2) or self-employed (4) • average of those employed in reference week (4 quarters) • Pension data [ONYF] • 28 categories by type of employment contract • duration of contract (pension insurance), in days • average employment: insured days/366

  13. Main results Unreported employment • after 2001: stable at 21-22 % of total LFS employment • much higher among men • higher among age 25-39 • higher in Central-Hungary • construction, drivers, personal services Minimum wage earners • in 2004: at the most 500 thousand (18% if employees)

  14. Stable at 21-22% since 2001

  15. Higher among men and aged 25-39

  16. Share of minimum wage earners by occupation310 thd (12%) at min.wage, 160 thd (6%) below min. wage

  17. Perceptions of researchers/media As consumers: • higher income urban population • esp in Budapest • hairdresser, nanny, cleaning lady, gardener • architects and construction workers As suppliers: • accountants, journalists, tax advisors, free-lance artists, owner-managers

  18. Strategies to fight it • surveillance: - refined indicators (not minimum wage!)- focus on high risk areas- link sources of info- fines- no corruption • taxes: simple and low • admin: simple • behaviour / attitudes:- communication: on govmt expenses, pension system, others’ behaviour, etc.

  19. Thank you for your attention!

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