Study: Loss in tax revenue due to untaxed wages totals almost €130 million
A study carried out by the Estonian Institute of Economic Research (EKI) into the prevalence of cash-in-hand wages shows that unfair tax practices likely resulted in a €127 million loss in tax revenue for the Estonian state in 2019.
The study by EKI shows that 5 to 8 percent of workers were paid cash-in-hand wages last year, roughly as many as the year before. The estimated loss in tax revenue increased due to increases in the employment rate and salary levels.
The loss in tax revenue for 2019, calculated on the basis of the average salary, consists of €98 million in lost social tax and €58 million in unpaid personal income tax.
Assuming recipients of cash-in-hand wages typically earned an average median income below the arithmetic average, the total loss in tax revenue likely amounted to around €127 million.
In long-term comparison, the payment of untaxed wages last year exhibited a downward trend compared with the period 2009-2017, and a big increase from the 2000s, when 15-16 percent of workers were paid cash-in-hand wages.
Close to three quarters of those who received untaxed waged have been paid either partly or fully in cash. In 77 percent of the cases, envelope wages were paid on top of taxed remuneration. Legal wages in these cases generally accounted for a larger portion of the income compared to untaxed wages.
Twenty-three percent of recipients of envelope wages received all of their remuneration unofficially without their working having been registered in the employment register or the state receiving any taxes from their wages. Cash-in-hand wages accounted on average for 43 percent of the recipients' income while the median average was 30 percent of the remuneration.
Of those who received untaxed wages, 58 percent occasionally received unofficial remuneration. The share of people who regularly receive cash-in-hand wages has gradually declined over the past few years, from 66 percent in 2016 to 42 percent in 2019.
Of the recipients of untaxed wages surveyed in 2019, 46 percent said that they received said wages for their main job, 39 percent received unofficial pay for an extra job and 15 percent were paid cash in hand in both their main as well as additional job.
Envelope wages were paid more frequently in 2019 in the restaurant business, transport and production, and in small enterprises with fewer than 20 employees, particularly in those experiencing economic difficulties.
Seventy-one percent of recipients of untaxed wages said the initiative to pay cash in hand came from the employer while 29 percent had themselves proposed to do so. The main motive was to receive higher wages, while those earning a higher salary said that the tax burden on workers is too heavy.
The 2019 study shows that attitudes have become more negative towards cash-in-hand wages as 74 percent were not in favor of them, whereas the corresponding figure was 69 percent the year before. The share of those favoring untaxed wages also fell from 13 percent to 9 percent. 17 percent of workers did not have an opinion on the matter.
No changes was registered in low-income earners' attitudes towards envelope wages as close to one-fifth still said they would consider accepting unofficial remuneration, which shows that difficulties with coping can affect people's attitudes, according to EKI. The economic situation, too, affects businesses' tax compliance, which improved under good conditions last year.
Envelope wages are income or a part of income from which the state is not paid any social tax, personal income tax, unemployment insurance or funded pension contributions.
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Editor: Helen Wright