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The minimum wage, informal pay and tax enforcement

Author

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  • Anikó Bíró

    (Institute for Fiscal Studies)

  • Daniel Prinz

    (Institute for Fiscal Studies)

  • László Sándor

    (Institute for Fiscal Studies)

Abstract

We study the taxation of the minimum wage in an environment with imperfect enforcement and informality. We leverage an increase in the audit threat for earnings below a reporting threshold at twice the minimum wage in Hungary and estimate reporting and employment responses with administrative panel data. Using bunching estimators and difference-in-differences methods, we show that a substantial share of those who report earning the minimum wage earn at least the same amount off the books. When enforcement is imperfect, a taxed minimum wage serves as a backstop on underreporting and recovers some revenue but also increases informality.

Suggested Citation

  • Anikó Bíró & Daniel Prinz & László Sándor, 2021. "The minimum wage, informal pay and tax enforcement," IFS Working Papers W21/41, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:21/41
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    Cited by:

    1. Gavoille, Nicolas & Zasova, Anna, 2023. "What we pay in the shadows: Labor tax evasion, minimum wage hike and employment," Journal of Public Economics, Elsevier, vol. 228(C).
    2. Reizer, Balázs & Gáspár, Attila, 2023. "Újabb hozzászólás az ismét elmaradt minimálbérvitához [A futher comment on the minimum wage debate]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(4), pages 365-380.
    3. Konstantins Benkovskis & Ludmila Fadejeva & Anna Pluta & Anna Zasova, 2023. "Keeping the best of two worlds: Linking CGE and microsimulation models for policy analysis," Working Papers 2023/01, Latvijas Banka.
    4. Garcia-Louzao, Jose & Tarasonis, Linas, 2023. "Wage and Employment Impact of Minimum Wage: Evidence from Lithuania," Journal of Comparative Economics, Elsevier, vol. 51(2), pages 592-609.
    5. Gavoille, Nicolas & Zasova, Anna, 2023. "Minimum wage spike and income underreporting: A back-of-the-envelope-wage analysis," Journal of Comparative Economics, Elsevier, vol. 51(1), pages 372-402.
    6. Kim, Ji Hwan & Lee, Jungmin & Lee, Kyungho, 2023. "Minimum wage, social insurance mandate, and working hours," Journal of Public Economics, Elsevier, vol. 225(C).
    7. Philippe Aghion & Ufuk Akcigit & Maxime Gravoueille & Matthieu Lequien & Stefanie Stantcheva, 2023. "Tax simplicity or simplicity of evasion? Evidence from self-employment taxes in France," POID Working Papers 050, Centre for Economic Performance, LSE.

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