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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.
Authors

Research Associate World Bank
Daniel is an economist at the World Bank. His research covers topics in public finance, including social insurance, taxation, and inequality.

Research Associate
Anikó is a Research Associate at the IFS and a senior researcher at the Institute of Economics, Centre for Economic and Regional Studies in Budapest.

László Sándor
Working Paper details
- DOI
- 10.1920/wp.ifs.2021.4121
- Publisher
- Institute for Fiscal Studies
Suggested citation
A, Bíró and D, Prinz and L, Sándor. (2021). The minimum wage, informal pay and tax enforcement. London: Institute for Fiscal Studies. Available at: https://ifs.org.uk/publications/minimum-wage-informal-pay-and-tax-enforcement (accessed: 6 February 2025).
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