Measuring the Shadow Economy: Endogenous Switching Regression with Unobserved Separation
AbstractWe develop an estimator of unreported income, perhaps due to tax evasion, that does not depend on as strict identifying assumptions as previous estimators based on microeconomic data. The standard identifying assumption that the self-employed underreport income whereas wage and salary workers do not is likely to fail in countries where employees are often paid under the table or engage in corrupt activities. Assuming that evading individuals have a higher consumption-income gap than non-evading ones due underreporting both to tax authorities and in surveys, an endogenous switching model with unknown sample separation enables the estimation of consumption-income gaps for both underreporting and truthful households. This avoids the need to identify non-evading and evading groups ex-ante. This methodology is applied to data from Czech and Slovak household budget surveys and shows that estimated evasion is substantially higher than found using previous methodologies.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6901.
Length: 22 pages
Date of creation: Oct 2012
Date of revision:
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Other versions of this item:
- Tomas Lichard & Jan Hanousek & Randall K. Filer, 2012. "Measuring the Shadow Economy: Endogenous Switching Regression with Unobserved Separation," Hunter College Department of Economics Working Papers 438, Hunter College: Department of Economics.
- C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
- E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- J39 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-20 (All new papers)
- NEP-ECM-2012-10-20 (Econometrics)
- NEP-IUE-2012-10-20 (Informal & Underground Economics)
- NEP-TRA-2012-10-20 (Transition Economics)
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