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Nonparametric expenditure-based estimation of income under-reporting and the underground economy

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  • Lindsay M. Tedds

Abstract

There is considerable interest in measuring the underground economy using microeconomic data. One such method estimates income under-reporting by households by assuming a known, parametric form of the Engel curve and making the further parametric assumption that households under-report their income by a constant fraction, independent of income. This paper proposes a nonparametric approach which avoids functional form restrictions and enables the reporting function to vary across income levels and household characteristics. I illustrate by estimating the effect of the Canadian Goods and Services Tax on income under-reporting.

Suggested Citation

  • Lindsay M. Tedds, 2004. "Nonparametric expenditure-based estimation of income under-reporting and the underground economy," Department of Economics Working Papers 2004-17, McMaster University.
  • Handle: RePEc:mcm:deptwp:2004-17
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    File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2004-17.pdf
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    References listed on IDEAS

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    1. A. Smith, Jeffrey & E. Todd, Petra, 2005. "Does matching overcome LaLonde's critique of nonexperimental estimators?," Journal of Econometrics, Elsevier, vol. 125(1-2), pages 305-353.
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    Cited by:

    1. 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.
    2. Engström, Per & Hesselius, Patrik, 2007. "The information method - theory and application," Working Paper Series 2007:17, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    3. Matthew J. Baker, 2014. "Adaptive Markov chain Monte Carlo sampling and estimation in Mata," Stata Journal, StataCorp LP, pages 623-661.
    4. Knut R. Wangen, 2005. "An Expenditure Based Estimate of Britain's Black Economy Revisited," Discussion Papers 414, Statistics Norway, Research Department.
    5. Tonin, Mirco, 2011. "Minimum wage and tax evasion: Theory and evidence," Journal of Public Economics, Elsevier, pages 1635-1651.
    6. Lindsay M. Tedds, 2005. "Keeping It Off The Books: An Empirical Investigation Into the Characteristics of Firms That Engage In Tax Non-Compliance," Department of Economics Working Papers 2005-01, McMaster University.
    7. Karine Torosyan & Randall K. Filer, 2014. "Tax reform in Georgia and the size of the shadow economy," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 22(1), pages 179-210, January.

    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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