Abstract
We study the implications of the minimum wage for taxation in an environment with imperfect enforcement and informality. Leveraging an increase in the audit threat for declared earnings below a threshold at twice the minimum wage in Hungary, we estimate reporting and employment responses with administrative panel data. Our bunching and difference-in-differences results show that a substantial share of those who report earning the minimum wage earn at least the same amount off the books. Our key insight is that a taxed minimum wage serves as a backstop on underreporting and recovers some revenue —even though it also increases informality.
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