Estimating Tax Noncompliance among the Self-Employed – Evidence from Pleasure Boat Registers

We improve upon the Pissarides-Weber method for estimating tax evasion among the self-employed by utilizing unique register-based consumption measures from the Swedish and Finnish mandatory registers for pleasure boats. The register data allows for more detailed and statistically powered analyses than survey-based applications. We evaluate i) the key assumption of equal preferences between self-employed and wage earner households, and ii) the functional form assumptions in the estimated Engel curves. Our results indicate overall levels of hidden incomes that are roughly in line with previous studies. However, the functional form analysis shows that the estimated sizes of income underreporting in absolute monetary amounts are almost constant over reported income levels, whereas previous studies have assumed that the underreporting is proportional to income. The results from the preference analysis – in which we compare households that will become self-employed in the near future with households that will remain wage earners – are mixed; the analysis shows that the two types of households have insignificant (Finland) or economically small (Sweden) preference differences. However, when we use engine power as a price proxy, the preference differences are substantially larger in both countries.