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

Merike Kukk and Karsten Staehr

No 8, TUT Economic Research Series from Department of Finance and Economics, Tallinn University of Technology

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

Keywords: income underreporting; business income; self-employed; tax auditing; Engel curve (search for similar items in EconPapers)
JEL-codes: E21 E26 H24 H26 (search for similar items in EconPapers)
Date: 2014-01-17
New Economics Papers: this item is included in nep-acc, nep-ent, nep-iue and nep-mac
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