high-income earners due to the elimination of the progressive rate structure. Average wage earners, married workers with children, and non-working spouses benefited from the refundable child benefit, while the tax wedge for single earners remained broadly constant.

65. In 2005, part of the pension contributions was redirected to the personal accounts of workers; as there exist property rights of such funds these contributions are no longer considered in OECD statistics as labor taxes. The labor market effect of this measure is, however, not clear. As the ―forced savings‖ did not reduce labor costs, it had no positive effect on labor demand. **A positive effect on employment could have, perhaps, resulted from higher labor supply but only if workers perceive this part of their pension contribution as an insurance premium and not as a tax.** 66. Overall, the tax reform of 2004 made the tax system simpler and more transparent. It also led, together with other changes, to a decline in the overall tax burden including the tax on labor. The tax reform and the tightening of social benefits should, in principle, have led to a significant decline in informal work, all the more as the economic growth was high and employment increased until 2007. But undeclared work appears to have declined only marginally since the reform, which suggests that there are also other factors at play. Indeed, many low-skilled workers remain unemployed, often with a long duration of unemployment and in particular in the less developed Eastern regions. These workers tend to have low skills, which reduces their productivity to below the minimum wage and have therefore difficulties finding a regular job. They are also reluctant to leave their region to find a job elsewhere. As a result, these people tend to resort to informal work.

67. While structural economic deficiencies may explain part of the informal economy in Slovakia, some undeclared work may – despite the profound tax reform – be related to taxation:

- Despite a decline in recent years, the **labor tax wedge for low-income earners continues to be relatively high** . As social security contributions (not health insurance) are capped at higher incomes (before 3 and now 4 times the average wage) the labor tax is regressive;

- **The significant upward step of the income tax (19 percent) just after the minimum wage may encourage workers to underdeclare wages** by only declaring the minimum wage even if they earn more;

- **Some tax credits are linked to working in the regular sector and** therefore ease the transition of families from non-employment or informal employment into formal employment, notably the tax credit for taxpayers with dependent children and for a spouse whose taxable income is below the basic allowance level. This latter tax credit may, however, create incentives for the spouse to work informally so that the first earner can fully benefit from the tax credit for the spouse;

- Another problem arises from the fact that self-employed workers benefit from a lower base of social security contributions, so that their labor tax wedge is lower than if they worked as employees, which **encourages bogus self-employment** .

68. The government responded to these problems by introducing a general employment tax credit in 2009, which reduces the effective labor tax wedge for lower incomes. In order to finance this measure the government discussed eliminating (or raising) the income ceilings and, perhaps, including capital income in the base for social contributions. This latter measure would also help discourage people from transforming labor income into capital income but it would weaken the link between contributions and benefits.

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