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The Rich Underreport Their Income: Assessing Biases In Inequality Estimates And Correction Methods Using Linked Survey And Tax Data

Author

Listed:
  • Sean Higgins

    () (Department of Economics, Tulane University)

  • Nora Lustig

    () (Stone Center for Latin American Studies, Department of Economics, Tulane University, Commitment to Equity Institute)

  • Andrea Vigorito

    () (Instituto de Economia)

Abstract

Do survey respondents misreport their income? If so, how does misreporting correlate with income, how does this affect estimates of income inequality, and how well do existing methods correct for bias? We use a novel database in which a subsample of Uruguay’s official household survey has been linked to tax records to document the extent and distribution of labor income underreporting and to assess the performance of various existing methods to correct inequality estimates. Individuals in the upper half of the income distribution tend to report less labor income in household surveys than those same individuals earn according to tax returns, and underreporting is increasing in income. Using simulations, we find that this leads to downwardbiased inequality estimates. Correction methods that rely only on survey data barely affect the biased inequality estimates, while methods that combine survey and tax data can lead to overcorrection and overestimation of inequality.

Suggested Citation

  • Sean Higgins & Nora Lustig & Andrea Vigorito, 2018. "The Rich Underreport Their Income: Assessing Biases In Inequality Estimates And Correction Methods Using Linked Survey And Tax Data," Commitment to Equity (CEQ) Working Paper Series 70, Tulane University, Department of Economics.
  • Handle: RePEc:tul:ceqwps:70
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    File URL: http://repec.tulane.edu/RePEc/ceq/ceq70.pdf
    File Function: First version, 2018
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    More about this item

    Keywords

    inequality; income underreporting; tax records; household surveys;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access

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