Tax Evasion and the Contribution-Benefit Link : The Case of Parental Benefits in Hungary and Latvia

Overview & Synopsis

This paper studies the interaction of the contribution-benefit link with tax evasion in the context of parental benefits in Hungary and Latvia. Across the two countries, institutional settings, and time periods, earnings and employment patterns suggest substantial pre-pregnancy underreporting, followed by partial formalization during pregnancy to increase benefits. Using policy reforms, the paper shows that the reporting response tracks changing incentives. The results indicate that even with third-party reporting, income underreporting can be common. Linking benefits to contributions when earnings are underreported may reduce evasion temporarily but can impose net fiscal costs depending on program design.