IDEAS home Printed from https://ideas.repec.org/p/eea/boewps/wp2013-6.html
   My bibliography  Save this paper

Income underreporting by households with business income. Evidence from Estonia

Author

Listed:
  • Merike Kukk

    ()

  • Karsten Staehr

Abstract

This paper estimates the extent of income underreporting by households with business income relative to households of wage earners in Estonia. The paper uses a modified version of the methodology pioneered by Pissarides and Weber (1989). The extent of income underreporting is estimated by comparing food Engel curves for households with and without business income. The baseline result is that the reported income of households with business income above 20% of total income must be multiplied by 2.6 in order to attain the same propensity of food consumption as households of wage earners. Households with business income above 0 but below 20% also underreport income, but to a lesser extent. The estimates are higher than those found for developed countries, but consistent with other studies of the shadow economy in transition countries. The analysis also shows that the presence of business income is a better indicator of income underreporting than a reported status of self-employment.

Suggested Citation

  • Merike Kukk & Karsten Staehr, 2013. "Income underreporting by households with business income. Evidence from Estonia," Bank of Estonia Working Papers wp2013-6, Bank of Estonia, revised 26 Jul 2013.
  • Handle: RePEc:eea:boewps:wp2013-6
    as

    Download full text from publisher

    File URL: http://www.eestipank.ee/sites/default/files/publication/en/WorkingPapers/2013/wp06_2013.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. David G. Mayes (ed.), 2009. "Microfoundations of Economic Success," Books, Edward Elgar Publishing, number 13158.
    2. Lars P. Feld & Friedrich Schneider, 2010. "Survey on the Shadow Economy and Undeclared Earnings in OECD Countries," German Economic Review, Verein für Socialpolitik, vol. 11(2), pages 109-149, May.
    3. Bruce, Donald, 2000. "Effects of the United States tax system on transitions into self-employment," Labour Economics, Elsevier, vol. 7(5), pages 545-574, September.
    4. Panayiota Lyssiotou & Panos Pashardes & Thanasis Stengos, 2004. "Estimates of the black economy based on consumer demand approaches," Economic Journal, Royal Economic Society, vol. 114(497), pages 622-640, July.
    5. Edvard Johansson, 2005. "An estimate of self-employment income underreporting in Finland," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 31, pages 99-109.
    6. Kim , Bonggeun & Gibson , John & Chung , Chul, 2009. "Using Panel Data to Exactly Estimate Income Under-Reporting by the Self Employed," Working Papers 09-2, Korea Institute for International Economic Policy.
    7. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4, National Bureau of Economic Research, Inc.
    8. Knut R. Wangen, 2005. "An Expenditure Based Estimate of Britain's Black Economy Revisited," Discussion Papers 414, Statistics Norway, Research Department.
    9. Per Engstrom & Bertil Holmlund, 2009. "Tax evasion and self-employment in a high-tax country: evidence from Sweden," Applied Economics, Taylor & Francis Journals, vol. 41(19), pages 2419-2430.
    10. Erik Hurst & Geng Li & Benjamin Pugsley, 2014. "Are Household Surveys Like Tax Forms? Evidence from Income Underreporting of the Self-Employed," The Review of Economics and Statistics, MIT Press, vol. 96(1), pages 19-33, March.
    11. Friedrich Schneider & Andreas Buehn & Claudio Montenegro, 2010. "New Estimates for the Shadow Economies all over the World," International Economic Journal, Taylor & Francis Journals, vol. 24(4), pages 443-461.
    12. Colin Williams, 2008. "Envelope wages in Central and Eastern Europe and the EU," Post-Communist Economies, Taylor & Francis Journals, vol. 20(3), pages 363-376.
    13. Jaanika Meriküll & Karsten Staehr, 2010. "Unreported Employment and Envelope Wages in Mid-Transition: Comparing Developments and Causes in the Baltic Countries," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 52(4), pages 637-670, December.
    14. Leping, Kristian-Olari & Toomet, Ott, 2008. "Emerging ethnic wage gap: Estonia during political and economic transition," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 599-619, December.
    15. Pissarides, Christopher A. & Weber, Guglielmo, 1989. "An expenditure-based estimate of Britain's black economy," Journal of Public Economics, Elsevier, vol. 39(1), pages 17-32, June.
    16. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, Juni.
    17. Herb J. Schuetze, 2002. "Profiles of Tax Non-compliance Among the Self-Employed in Canada: 1969 to 1992," Canadian Public Policy, University of Toronto Press, vol. 28(2), pages 219-237, June.
    18. Colin C. Williams, 2009. "The Commonality of Envelope Wages in Eastern European Economies," Eastern European Economics, Taylor & Francis Journals, vol. 47(2), pages 37-52, March.
    19. Merike Kukk & Dmitry Kulikov & Karsten Staehr, 2012. "Consumption sensitivities in Estonia: income shocks of different persistence," Bank of Estonia Working Papers wp2012-3, Bank of Estonia, revised 01 Mar 2012.
    20. Egle Tafenau & Helmut Herwartz & Friedrich Schneider, 2010. "Regional Estimates of the Shadow Economy in Europe," International Economic Journal, Taylor & Francis Journals, vol. 24(4), pages 629-636.
    21. Joel Slemrod, 2007. "Cheating Ourselves: The Economics of Tax Evasion," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 25-48, Winter.
    22. Schneider, Friedrich, 2011. "The Shadow Economy and Shadow Economy Labor Force: What Do We (Not) Know?," IZA Discussion Papers 5769, Institute of Labor Economics (IZA).
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    tax evasion; business income; income underreporting; Engel curve; transition country;

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eea:boewps:wp2013-6. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peeter Luikmel). General contact details of provider: http://edirc.repec.org/data/epgovee.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.