Working Paper Series, Uppsala Center for Fiscal Studies, Department of Economics, Uppsala University
Income underreporting among the self-employed: a permanent income approach
() and Johannes Hagen
Abstract: The consumption based method to estimate underreporting
among self-employed, introduced by Pissarides andWeber (1989), is one of
the workhorses in the empirical literature on tax evasion/avoidance. We
show that failure to account for transitory income fluctuations in current
income may overestimate the degree of underreporting by around 40 percent.
Previous studies typically use instrumental variable methods to address the
issue. In contrast, our access to registry based longitudinal income
measures allows a direct approach based on more permanent income measures.
This also allows us to evaluate the performance of a list of instruments
widely used in the previous literature. Our analysis shows that capital
income is the most suitable instrument in our application, while education
and housing related measures do not seem to satisfy the exclusion
Keywords: Income underreporting; tax evasion; self-employment; Engel curves; permanent income; (follow links to similar papers)
JEL-Codes: D12; H24; H25; H26; (follow links to similar papers)
24 pages, June 15, 2015
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- This paper is published as:
Engström, Per and Johannes Hagen, (2017), 'Income underreporting among the self-employed: a permanent income approach', European Economic Review, Vol. 92, February, pages 92-109
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