Transcript Slide 1

Reducing Undeclared Work in
Hungary- the role of Tax policy
and administration
by
Willi Leibfritz
Undeclared work in Hungary
What is the problem and how big is it?
What are the reasons? High taxes or ineffective
enforcement or both?
• Tax level and tax mix
• Labour tax burden and labour market outcomes
• Measuring cost-efficiency and effectiveness of tax
administration
Policies to reduce undeclared work: a „carrot and
stick“ approach
EU survey on undeclared work (1)
Questions relating to the size of undeclared work
•
Have you required services, stemming from undeclared work? Did you
carry out undeclared work? Did your employer pay out part or total
salary in cash? Is undeclared work acceptable or not?
Answers in Hungary
•
Always above EU 27 average, but never in the top group (like Denmark,
The Netherlands, Latvia, Estonia, Bulgaria and Sweden), with country
ranking depending on the individual questions.
Which sectors and groups are most affected?
Ranking in Hungary
•
Construction, repair, retail, household services, industry, agriculture,
transport, hotels and restaurants
•
Unemployed, illegal immigrants, self-employed, pensioners, fullyemployed workers, part-time workers
EU survey on undeclared work (2)
What are the main reasons for under-declared work?
General anwers in Hungary
•
•
lower price of goods and services (59%)
helping someone in need of money (20%)
Answers from suppliers of undeclared work in Hungary
•
•
•
•
•
•
Seasonal work not worth declaring (55%)
Both parties benefitted from it (51%)
High level of taxes and social security contributions (36%) (EU average 13%)
Person who acquired it insisted on non-declaration (28%)
Could not find a regular job (27%)
Undeclared work is common practice (21%)
•
•
Could get a higher fee for work (19%)
Unsatisfiesd with public services (15%)
Size of informal economy and fiscal costs
• EUROSTAT (2000) 12% (Poland and Slovakia 15%, Czech
Republic 7%)
• Estimates by others (Lacko, Todt, Semjén):
17-18% in 2006, down from one third in 1993
• World Bank/EBRD survey: Hungarian firms did, on average,
not declare 10-15% of their sales,
10-15% of firms bribed tax collectors (somewhat lower than in
Poland and Slovakia but higher than in Czech Republic,
Slovenia, Estonia, Latvia, Lithuania)
• 30% revenue gap in social security contributions
• Effective VAT rate is only 46% of standard rate
Assessing the tax system
• The overall tax level, as measured by tax revenues as
% of GDP, is relatively high, despite pervasive tax
evasion
• The tax mix is dominated by taxes on labour and
consumption while capital taxation is relatively low
• The implicit tax rates on labour and consumption are
well above EU average (tax revenues as % of
theoretical tax base from National Accounts)
Tax level in international comparison
Tax revenues incl. social security contributions as % of GDP
Tax Revenue in percent of GDP (%)
60
Sweden
50
Denmark
Finland
France
Czech Republic
Italy
40
Norway
Iceland
Netherlands
United Kingdom
Spain Germany
Poland
Canada
PortugalGreece
Ireland
Slovak Republic
Australia
Hungary
Brazil
Turkey
30
Belgium
Austria
New Zealand
South Africa
Switzerland
Korea
Russia
Argentina
Japan
United States
20
China
Mexico
INDIA
10
0
5 000
10 000
15 000
20 000
25 000
30 000
GDP per capita PPP (USD)
35 000
40 000
45 000
Tax level excl. social security contributions
Tax Revenue in percent of GDP (%)
60
50
Denmark
40
New Zealand
Iceland
Norway
Finland Belgium
Australia
United Kingdom
Italy
South Africa
Austria
Hungary
FranceCanada
Ireland
PortugalGreece Spain
Netherlands
Russia
Argentina
Switzerland
Czech Republic
Germany
Korea
Poland
30
Brazil
Turkey
20
INDIA
Sweden
China
Mexico
Slovak Republic
United States
Japan
10
0
5 000
10 000
15 000
20 000
25 000
30 000
GDP per capita PPP (USD)
35 000
40 000
45 000
Taxes on labour as % of GDP
Averages 1995-2004
35
30
25
% GDP
20
15
10
5
0
SE
DK
BE
FI
AT
DE
FR
SI
EU- HU
25
Employed paid by employers
NL
IT
EE
CZ
LU
ES
PL
Employed paid by employees
LV
SK
LT
PT
UK
EL
Non-employed
IE
CY MT
Taxes on consumption as % of GDP
Averages 1995-2004
16
14
12
% GDP
10
8
6
4
2
0
DK HU
SI
FI
EL
SE
AT
EE
PL
UK
IE
LT
FR
PT
SK
LV
LU EU- NL
25
BE
CY MT
CZ
IT
DE
ES
Taxes on capital as % of GDP
14,0
12,0
Averages 1995-2004
10,0
% GDP
8,0
6,0
4,0
2,0
0,0
LU
IT
UK
BE
EL
FR
Income of corporations
NL
CY
ES EU- PT
25
MT
Income of households
IE
FI
PL
AT
CZ
Income of self-employed
DK
SE
DE
SK
HU
LV
Stock (wealth) of capital
SI
EE
LT
Average implicit tax rates on consumption and labour in Hungary and the EU-27
44
31.0
43
29.5
42
28.0
41
26.5
40
25.0
39
23.5
38
22.0
37
20.5
36
19.0
1995 1996
1997 1998 1999
2000 2001 2002 2003
2004 2005
Labour income, HU (left axis)
Labour income, EU27 (left axis)
Consumption, HU (right axis)
Consumption, EU27 (right axis)
Labour tax burden
• Average and marginal labour tax wedges are
high in international comparison and in
absolute terms
• The withdrawal of income dependent benefits
increases the marginal effective tax rate
(METR) further and increases incentives to
under-declare wages and to work in the
informal sector
Average labour tax wedge
0,0
10,0
20,0
30,0
40,0
50,0
60,0
Be lgium
Ge r m any
Hungar y
Fr ance
Aus tr ia
Sw e de n
Italy
Ne the r lands
Finland
Poland
Tur k e y
Cze ch Re public
De nm ar k
Gr e e ce
Spain
Slovak Re public
.
Income tax
OECD ave r age
Nor w ay
Employee SSC
Luxe m bour g
Por tugal
Unite d Kingdom
Canada
Sw itze r land
Unite d State s
Japan
Ice land
Aus tr alia
Ir e land
Ne w Ze aland
Kor e a
M e xico
Employer SSC
Marginal effective tax rates incl. withdrawal of income
dependent benefits
40000
120
Marginal effective tax rate (%)
100
30000
20000
10000
80
60
40
20
0
0
0
1000000
2000000
Gross wage
No. of households
Marginal effective tax rate (%)
3000000
Marginal effective tax rate incl. all payroll taxes
125%
7.000.000
6.000.000
100%
5.000.000
2.000.000
50%
1.000.000
0
25%
marginal/average rates
75%
3.000.000
-1.000.000
-2.000.000
0%
-3.000.000
% of AW
-25%
income tax central
employer SSC
family benefits
net personal marginal tax rate
average tax wedge
income tax local
payroll taxes
net earnings
marginal tax wedge
average income tax rate
employee SSC
gross earnings
total labour cost
net personal average tax rate
220
210
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
-4.000.000
30
national currency per year
4.000.000
Elements of the tax system which also create
incentives for tax evasion
• The large gap between tax rates on labour and
profits contributes to under-declaring wages
• Self-policing nature of VAT should, in principle, help
to combat evasion. It is also a means of taxing
(indirectly) those who escape direct taxation
• Simplified tax treatment, such as EVA, has positive
and negative effects on evasion, with the net effect
being (probably) negative
Net income as % of total wage costs
EVA
Annual income (HUF)
2 Mio 4 Mio 10 Mio
64.5
76.7 83.9
EKHO
61.7
65.8
60.8
Dependent employment
46.9
40.8
38.9
Effects of taxes on the labour market and undeclared work
• The effect of labour taxes on wage costs and employment
depend on the flexibility of wages
• Minimum wage sets a floor to the gross wage so that
employer contributions have to be born by firms and raise
wage costs
• The combination of high labour taxes and high minimum
wages reduces job opportunities for lower-skilled workers in
the formal sector and creates incentives to under-declare
earnings
• The higher the minimum wage, the bigger the incentive to
just declare the minimum wage
Labour tax wedge and employment in international comparison
Aggregate tax wedge at the country level
Annual hours worked per person in employment
2100
Grc
Cze
2000
Pol
Hun
1900
Usa
1800
Aus
Jpn
Can
Isl
Ita
Svk
1700
Irl
Esp
Fin
Prt
Gbr
Aut
Swe
1600
Lux
Fra
Bel
1500
Dnk
Deu
1400
Nld
Nor
1300
1200
0 .3
0.4
0 .5
0 .6
(Taxes and social contributions + indirect taxes) / GDP
Source
: Bassanini and Duval (2006);
OECD Economic Outlook
No 81, OECD Taxing Wages database.
0 .7
Tax policies to reduce undeclared work (1)
Designing a strategy
How to overcome the dilemma of the need to reduce
labour taxes without putting fiscal consolidation at
risk?
„Carrot and stick“ approach: Reduce labour taxes,
increase some other taxes and strengthen
enforcement
Set a revenue target and promise that any additional
revenue from improved enforcement will be used for
tax cuts in the next year
Tax policies to reduce undeclared work (2)
Changing the tax mix
• reduce employer contributions to social
security
• increase dividend tax
• raise VAT
• introduce real estate tax
Tax policies to reduce undeclared work (3)
• Simplifying the tax system (reduce loopholes
and exemptions, eliminate minor taxes)
Tax policies to reduce undeclared work (4)
• Targeting specific sectors (retail sector,
construction etc.)
Social and labour market policies to
reduce undeclared work
• Strengthen the link between social security
contributions and benefits
• Reduce undeclared work of unemployment
benefit recipients
- by better monitoring
- by allowing them to work officially within
limits
Some (tentative) considerations about
improving tax collection (1)
Are tax authorities under-staffed?
0
Czech R.
Netherl.
Portugal
Slovakia
France
Poland
UK
Hugary
OECD
Belgium
Ireland
Spain
Denmark
Austria
Sweden
Tax authority administration costs/net revenue (2004) %
2.5
2
1.5
1
0.5
0
Spain
OECD
Sweden
Slovakia
Austria
Hugary
France
Portugal
Poland
UK
Czech R.
Denmark
Netherl.
Ireland
Belgium
Inhabitants/full-time tax authority
employees (2004)
1800
1600
1400
1200
1000
800
600
400
200
Some (tentative) considerations about improving tax collection
• Should the various institutions (APEH, Customs and Finance
Guard HCFG, local tax administrations) be merged into one
agency?
• Should tax authorities be more independent (e.g. from
political influences, setting performance-based pay to
boosting motivation of staff)?
• Is the organisational structure of APEH by functions
(registration, accounting, information processing, audit,
collection) too rigid and should it be supplemented by a
taxpayer- type organisation (large business, SMEs, selfemployed, employees etc.)?
• How could auditing be improved? (Joint auditing of all taxes,
Risk analysis)
The End