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Raising minimum contributions to cut tax evasion may reduce employment

13/05/2009 | News

ATV invited editors of a recently published book on the hidden economy, along with former tax authority chief Szabolcs Vámosi-Nagy and co-author Ágota Scharle to discuss current trends in tax evasion in Hungary.

As Ágota explained, the recent initiative of "whitening" the economy has been based to a large extent on increasing minimum contributions, which may reduce demand for low-qualified workers and hence reduce employment. The emprical findings published in the book however suggest that there is some scope for a strategy of fine-tuned targeting in enforcing tax compliance instead of across-the-board measures.

It seems also likely that a significant share of undeclared activities would not be viable at the current level of taxation and social security contributions, as the total cost of employing an unskilled worker tends to exceed their productivity. This implies that, unless it is supplemented by a sizeable reduction in wage costs, a further tightening of the enforcement of tax compliance would only lead to unemployment instead of an increase in registered employment.

Government is merely a means to an end, viz. the happiness of the whole community and the individuals composing it. (James Mill, 1820)