88. In _Estonia_ , social security is financed by income-related contributions (social tax) and by state transfers. Self-employed persons have to pay contributions to the general pension scheme and to health insurance. They can also join, on a voluntary basis, the unemployment insurance. The self-employed have a somewhat simplified tax regime as they can declare their income once a year and they are able to use cash basis, but the rates for personal income tax and social contributions are the same as for dependent workers. However, the selfemployed use various opportunities to evade or avoid labor taxation so that their actual contribution to government revenue remains very small. There is also some evidence that part of self-employment, notably in the construction sector, is forced self-employment. This has initiated a discussion about the insufficient social security coverage of these workers and measures have been taken to improve the situation. For example, the self-employed have obtained a right to join the second pillar of the pension insurance scheme.

89. In _Lithuania_ , self-employed persons are generally covered on a compulsory basis only by pension social insurance to receive the basic pension and, if their income (and contribution) exceeds a certain amount, also the supplementary pension. By paying national social insurance contributions these individuals acquire a right to receive old-age pensions and disability pensions. Individuals having obtained business certificates or individual activity certificates for certain types of business also have to pay health insurance contributions on an obligatory basis. Until 2008, the self-employed benefited from a lower personal income tax (15 percent) as compared to employees (24 percent) but with the reduction of the personal income tax rate in 2009 to 15 percent this preferential treatment was abolished.

**<u>Table 11: Self-employed as a percentage of total employment</u>**

||1995|2000|2005|2006|2007|
|---|---|---|---|---|---|
|Bulgaria|.|28.2|27.8|27.2|26.6|
|Czech Rep.|13.8|17.4|18.2|18.2|18.2|
|Estonia|6.9|9|8.1|8.1|9.1|
|Latvia|14.9|15|11.6|11.7|10.8|
|Lithuania|18.8|19.7|17.1|15.8|13.7|
|Hungary|17.8|15.1|13.8|12.7|12.4|
|Poland|34.5|36.2|28.3|27.9|26.8|
|Romania|.|.|33.5|31.7|31|
|Slovenia|18.8|18.5|17.6|17.4|17|
|Slovakia|6.6|8.3|13|13|13.2|
|EU-27|17.9|16.7|16.3|16.1|15.9|

_Sources:_ Eurostat: National Accounts Statistics; Research Institute for Labor and Social Affairs (RILSA), Prague.

# **12. Effective Tax Administration Is a Precondition for Combating Undeclared Work**

90. An effective tax administration is crucial for reducing tax evasion. It requires a high quality and sufficient quantity of staff and its efficient allocation among the various functions, notably auditing; this increases the risk of tax evaders being caught. However, relying only on stronger enforcement has an ambiguous effect: while it forces some firms into compliance, others may drop out of the market or go underground. Besides its revenue raising objective, tax administration must therefore also consider its service function for taxpayers, so that they can meet their obligations without undue costs. The task of tax administration is easier if the tax burden is relatively low and the system is relatively simple and when withholding taxes 37