InTEL: Institutions and Tax Enforcement in Latvia (2018–2021)

Duration: January 2018 – December 2021.

The project was funded by the Latvian Science Council.

Core team of researchers: Nicolas Gavoille, Vitalijs Jascisens, Arnis Sauka, Anna Zasova,

Associated researchers: Marija Krumina, Anna Pluta,

In 2018–2021, a research team at BICEPS and SSE Riga was working on a 3-year project “Institutions and Tax Enforcement in Latvia (InTEL)”, which focused on studying the role of policies in combating various forms of tax evasion. The project was funded by the Latvian Science Council, project No. lzp-2018/2-0067.

It has long been accepted that tax evasion has been widely prevalent in Latvia. While the exact estimates of the size of undeclared economy vary, all suggest that Latvia ranks among the top countries in the European Union in terms of its scope. Available cross-country evidence suggests that the share of employees who admit having evaded payroll taxes is 11% in Latvia, the highest share among the EU countries (European Commission, “Undeclared Work in European Union”, Special Eurobarometer 402). Moreover, the amount of lost revenues to tax authorities is quite substantial — 40% of employees who have evaded payroll taxes have not declared between 50% and 100% of their reported gross wages. Similar results are obtained by Putniņš and Sauka (“Shadow Economy Index for the Baltic Countries 2009–2017,” Centre for Sustainable Business, SSE Riga), who focus exclusively on the Baltic states. They provide survey evidence on the payroll tax evasion in the three Baltic countries showing that in recent years the share of unreported wages in Latvian private sector have varied between 18% and 35%, the highest share in the Baltics.

Even though Latvia is estimated to have experienced a contraction in an undeclared economy after the peak reached during the financial crisis of 2008-2009, its size remains considerable. There are two important factors that make it difficult to effectively reduce tax evasion. First, it comes in different shapes and sizes, and second — the participation is also diverse. Even though previous research already addressed some of these challenges and focused on a number of issues, in particular on measuring the scope and identifying the main groups engaged in tax evasion in Latvia, there is still a gap in research that examines policies on combating tax evasion.

This research project addressed this gap by giving a central role to policies. The project team consisted of leading Latvian researchers specializing in tax evasion research, who also have broad experience in policy advice. The project has combined a solid academic approach with the availability of unique high-quality administrative datasets and survey data. Our main findings are summarized in five publications listed below.

Working papers/articles/other publications

1. Foreign Ownership and Labor Tax Evasion: Evidence from Latvia, by Nicolas Gavoille and Anna Zasova

Working paper / Article (Economics Letters) / FREE Policy brief

2. Minimum Wage Spike and Income Underreporting: a Back-of-the-Envelope-Wage Analysis, by Nicolas Gavoille and Anna Zasova

Working paper

3. Million Dollar Baby: Should Parental Benefits Depend on Wages When Payroll Tax Evasion is Present?, by Vitalijs Jascisens and Anna Zasova

Working paper

4. Hysteresis of Austerity: Evidence from a Large-Scale Pension Reform, by Vitalijs Jascisens and Anna Zasova

Working paper

5. Shifting Tax Burden from Labor to Property: The Case of Latvia, by Anna Pluta and Anna Zasova

Conference proceedings

Conference

Another key outcome of the project was an international two-day conference “Corruption, Tax Evasion and Institutions” organized by BICEPS on May 27-28, 2021. For more information, visit the conference page.