Evaluation of the underreporting of income across households in Bulgaria: extending the Pissarides-Weber approach

Abstract

We estimate the personal income tax (PIT) gap in Bulgaria using the Pissarides and Weber (1989) methodology (“traces of true income” approach), which compares the relationship between food expenditure and income of self-employed and other employees. Our analysis relies on a unique anonymized dataset prepared by the National Statistical Institute from Household Budget Survey and National Revenue Administration records, providing a more reliable measure of income than survey data alone. Extending the standard PW framework, we estimate under-reporting not only among the self-employed but also among private-sector employees. Our results show that unreported labour income averaged 6.37% of GDP during 2017–2021 (excluding 2020), with private-sector employees contributing 5.36% and the self-employed 1.01%. The PIT gap amounted to 13.8% of theoretical revenues, while the social security contribution gap reached 16.5%, corresponding to lost revenues of 0.54% and 1.71% of GDP, respectively. Moreover, our analysis also shows that households with children and younger earners are more prone to under-reporting. These findings underscore the importance of accounting for household characteristics when designing policies to mitigate tax non-compliance.