Do Individuals Comply on Income Not Reported by Their Employer?

Individuals with income not reported to the tax authority by a third party (e.g., the self-employed, those earning tips) may be less likely to be detected evading taxes relative to the case in which their income is subject to third-party reporting. However, their compliance responses—to changes in the proportion of income that is reported to the tax authority, to changes in audit and tax rates, etc.—are largely unknown, in part because of the difficulty in obtaining information on individual choices in these situations. The authors use experimental methods to examine individual income tax compliance in settings where individuals differ in the portion of their income that is ``matched'' (reported to the tax authority via third-party information) versus ``nonmatched'' (not fully reported to the tax authority). The results indicate that individuals who have relatively more nonmatched income exhibit significantly lower tax compliance rates than individuals who earn relatively less nonmatched income.