Abstract
This paper assesses tax compliance and under-reporting of income in Romania, overall, and for different population groups, including among minimum wage workers, to understand the distributional implications and its links with minimum wage policy and design. Understanding the extent and the distribution of tax evasion is relevant for enhancing domestic tax capacity, its redistributive impacts, and the links with social policy, including minimum wage policy. The estimate of average underreporting of income is challenging due to the significant underrepresentation of top incomes in survey data. After censoring, the average underreporting of income is 6%. When looking at the distribution of tax evasion, the analysis also shows significant underreporting of income in the bottom half of the income distribution. The results show that tax-reported income at the median of the income distribution equals only 90% of the true (survey) income, while at the 25th percentile, this share is 83%. Women are also more tax-compliant than men. Tax compliance varies across sectors of the economy, regions of the country, and demographic groups. Transport, construction, and food and accommodation are the sectors of the economy with the lowest tax compliance. The under-reporting of income results in the lower fiscal capacity of the country and may also lower the efficiency of means-tested social assistance. The under-reporting of income significantly increases the share of minimum wage earners, which may impact the minimum wage policy.