Estimation methods for the personal oncome tax gap (including social security contributions) in the EU : Part 1: Evaluation of methods

This report presents an assessment of personal income tax (PIT) and social security contributions (SSC) compliance gap estimation methodologies to inform a methodological and operational framework for yearly EU27 and per Member State gap estimations. The analysis comprehensively covers the overall non-compliance for the PIT and SSC. It includes numerous components, such as income underreporting, non-declared wages, the overestimation of deductions, transfers of wealth and income abroad, income source misclassifications, and administrative errors and omissions. Empirical studies and methodological guidelines reviewed point to several bottom-up and top-down approaches, estimating PIT and SSC compliance gaps in the EU and abroad. Bottom-up approaches use micro-level data to estimate non-compliance levels and extrapolate results to the entire population. Its core information sources are random and risk-based audits, and household surveys with income and expenditure questions. Top-down approaches estimate the whole tax base (theoretical tax liability). Its main sources include national accounts (which provide tax base information), or global portfolio assets and liabilities data to determine international tax evasion. In addition, other top-down PIT and SSC gap estimates have also used macro variables to estimate the scale of the underground economy as a non-filing and underreporting proxy. International institutions' PIT and SSC compliance gap estimation experience suggests that the methodology choice is highly dependent on available data and resources, as well as policy priorities. Developing PIT/SSC gap estimation methodologies is an ongoing process and arriving at clearly defined and stable procedures can take several years. Our analysis of international practices indicates that a harmonised methodology combining complementary approaches and data sources is necessary to achieve robust gap estimates.