Tackling Falsely-Declared Salaries in Bulgaria: Evidence from a 2015 Survey

Abstract

Recently, there has been growing interest in the illegal wage practice  where formal employers pay their formal  employees two wages, namely an official  declared wage plus an additional undeclared  (envelope) wage, which reduces the tax  and social contributions that are paid to  the authorities. The aim of this paper is  to evaluate the prevalence and nature  of this illegal practice in Bulgaria and the  effectiveness of different policy approaches  for tackling this practice. Until now, two  competing policy approaches have been  advocated, namely a conventional rational economic actor approach which seeks to  increase the perceived or actual penalties  and probability of being caught, and an  emergent social actor approach that seeks  to improve tax morale. Reporting a 2015  nationally representative survey comprising  2,004 face-to-face interviews conducted  in Bulgaria, the finding is that just under  1 in 7 formal employees (14.4 per cent)  reported receiving an additional undeclared  (envelope) wage from their formal employer,  with the mean amount of their net income  unreported amounting to 29.8 percent.  Contrary to the widely-held assumption that  this illegal wage practice is always purely the  decision of employers, a key finding is that  this is the case in less than two-thirds (65.3  per cent) of reported cases. Employees  in some one-third of cases asserted that  it was either a joint idea or that they had  suggested this illegal arrangement. Adopting  an evidence-based approach to evaluating  how this should be tackled, a logit marginal  effects regression analysis reveals little  support for the rational economic actor  approach that seeks to reduce falselydeclared  salaries by increasing the penalties  and probability of being caught, but strong  support for the social actor approach that  decreases instances of falsely-declared  salaries by improving tax morale. The paper  concludes by discussing implications for  theory and policy.