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Identification of Income Underreporting by the Self-Employed: Employment Status or Reported Business Income?

Author

Listed:
  • Merike Kukk

    (Tallinn University of Technology)

  • Karsten Staehr

    (Tallinn University of Technology Eesti Pank)

Abstract

Pissarides & Weber (1989) proposed the use of data on income and food consumption for estimating the extent of income underreporting and possibly tax evasion by the self-employed. This paper is the first to investigate the importance of the way in which self-employed households are identified. Using household budget data from Estonia, the underreporting by self-employed households is computed with different identification methods. The share of unreported income is estimated to be at least twice as large when self-employed households are identified using the share of business income than is the case when they are identified using their employment status. Further analysis confirms that the share of reported business income is indeed a better indicator of income underreporting than the reported employment status. The results may facilitate better governance by helping data collectors to identify households prone to income underreporting. Keywords: income underreporting, business income, self-employed, tax auditing, Engel curveJEL codes: H26, E21, E26, H24

Suggested Citation

  • Merike Kukk & Karsten Staehr, 2014. "Identification of Income Underreporting by the Self-Employed: Employment Status or Reported Business Income?," TUT Economic Research Series 8, Department of Finance and Economics, Tallinn University of Technology.
  • Handle: RePEc:ttu:tuteco:8
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. 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.
    4. Merike Kukk & Karsten Staehr, 2014. "Income underreporting by households with business income: evidence from Estonia," Post-Communist Economies, Taylor & Francis Journals, vol. 26(2), pages 257-276, June.
    5. 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.
    6. 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.
    7. 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.
    8. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
    9. Alm, James & Bahl, Roy & Murray, Matthew N, 1991. "Tax Base Erosion in Developing Countries," Economic Development and Cultural Change, University of Chicago Press, vol. 39(4), pages 849-872, July.
    10. 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.
    11. Mukhtar Ali & H. Cecil & James Knoblett, 2001. "The effects of tax rates and enforcement policies on taxpayer compliance: A study of self-employed taxpayers," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 29(2), pages 186-202, June.
    12. Bojan Nastav & Štefan Bojnec, 2008. "Small Businesses and the Shadow Economy," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(01-02), pages 68-81, January.
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    Cited by:

    1. Kristjan Liivamägi & Tarvo Vaarmets & Tõnn Talpsepp, 2014. "Masters of the Stock Market," TUT Economic Research Series 16, Department of Finance and Economics, Tallinn University of Technology.
    2. Kaire Põder & Triin Lauri, 2014. "Will Choice Hurt? Compared to What? School Choice Experiment in Estonia," TUT Economic Research Series 11, Department of Finance and Economics, Tallinn University of Technology.
    3. Andre Veski & Kaire Põder, 2015. "Primary School Choice in Tallinn: Data and Simulations," TUT Economic Research Series 20, Department of Finance and Economics, Tallinn University of Technology.
    4. Tarvo Vaarmets & Kristjan Liivamägi & Tõnn Talpsepp, 2014. "The brilliant mind of investors," TUT Economic Research Series 15, Department of Finance and Economics, Tallinn University of Technology.
    5. Karsten Staehr, 2014. "Corporate Income Taxation in Estonia. Is It Time to Abandon Dividend Taxation?," TUT Economic Research Series 9, Department of Finance and Economics, Tallinn University of Technology.

    More about this item

    Keywords

    income underreporting; business income; self-employed; tax auditing; Engel curve;

    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

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