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The distributional implications of income underreporting in Hungary

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  • Benedek, Dora
  • Lelkes, Orsolya

Abstract

The paper estimates the distributional implications of income tax evasion in Hungary based on a random sample of administrative tax records of 230 thousand individuals. Gross incomes in the administrative tax records are compared with those in a nationally representative household budget survey, assuming that tax-evaders are more likely to report their true incomes in an anonymous interview. Our estimates show that the average rate of underreporting is 11%, which conceals large differences between self-employed (who hide the majority of their incomes) and employees. The estimates are likely to be lower bound, due to measurement error in the income survey. These rates are then used in EUROMOD, a tax-benefit microsimulation model to calculate the fiscal and distributional implications of underreporting, while taking account of all major direct taxes and cash benefits and also their interactions. Tax evasion reduces fiscal revenues from personal income taxes by about 19%. While the occurrence of poverty is not affected, income inequality becomes significantly higher (the Gini coefficient increases by 7%), suggesting that high earners tend to evade proportionately more. Finally, we find that tax evasion largely reduces the progressivity of the tax system.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17287.

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Date of creation: 09 Sep 2009
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Handle: RePEc:pra:mprapa:17287

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Keywords: tax policy; tax evasion; income distribution; self-employed;

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Cited by:
  1. European Commission, 2013. "Tax reforms in EU Member States - Tax policy challenges for economic growth and fiscal sustainability – 2013 Report," Taxation Papers, Directorate General Taxation and Customs Union, European Commission 38, Directorate General Taxation and Customs Union, European Commission.
  2. Vassiliki Koutsogeorgopoulou & Manos Matsaganis & Chrysa Leventi & Jan-David Schneider, 2014. "Fairly Sharing the Social Impact of the Crisis in Greece," OECD Economics Department Working Papers 1106, OECD Publishing.
  3. Tamar Khitarishvili, 2010. "Assessing the Returns to Education in Georgia," Economics Working Paper Archive wp_608, Levy Economics Institute.
  4. Francesco Figari & Paulus, A. (Alari), 2012. "GINI DP 28: The impact of indirect taxes and imputed rent on inequality: A comparison with cash transfers and direct taxes in five EU countries," GINI Discussion Papers, AIAS, Amsterdam Institute for Advanced Labour Studies 28, AIAS, Amsterdam Institute for Advanced Labour Studies.
  5. Leventi, Chrysa & Matsaganis, Manos & Flevotomou, Maria, 2013. "Distributional Implications of Tax Evasion and the Crisis in Greece," EUROMOD Working Papers em17/13, EUROMOD at the Institute for Social and Economic Research.
  6. Manos Matsaganis & Chrysa Leventi & Maria Flevotomou, 2012. "The Crisis and Tax Evasion in Greece: What are the Distributional Implications?," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 13(2), pages 26-32, 07.

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