The paper estimates the distributional implications of income tax evasion in Hungary based
on a random sample of administrative tax records of 230 thousand individuals. Gross incomes
in the administrative tax records are compared with those in a nationally representative
household budget survey, assuming that tax-evaders are more likely to report their true
incomes in an anonymous interview. Our estimates show that the average rate of
underreporting is 11%, which conceals large differences between self-employed (who hide
the majority of their incomes) and employees. The estimates are likely to be lower bound, due
to measurement error in the income survey. These rates are then used in EUROMOD, a taxbenefit
microsimulation model to calculate the fiscal and distributional implications of
underreporting, while taking account of all major direct taxes and cash benefits and also their
interactions. Tax evasion reduces fiscal revenues from personal income taxes by about 19%.
While the occurrence of poverty is not affected, income inequality becomes significantly
higher (the Gini coefficient increases by 7%), suggesting that high earners tend to evade
proportionately more. Finally, we find that tax evasion largely reduces the progressivity of the
tax system.