Are household surveys like tax forms: evidence from income underreporting of the self-employed

By Erik Hurst, Geng Li, Benjamin W. Pugsley. 2011

292 citations recorded by the source corpus.

There is a large literature showing that the self-employed underreport their income to tax authorities. In this paper, we quantify the extent to which the self-employed also systematically underreport their income in U.S. household surveys. To do so, we use the Engel curve describing the relationship between income and expenditures of wage and salary workers to infer the actual income, and thus the reporting gap, of the self-employed based on their reported expenditures. We find that the self-employed underreport their income by about 30 percent. This result is remarkably robust across data sources and alternative model specifications. Failing to account for such income underreporting leads to biased conclusions. We document this bias in existing measures of earnings differentials, wealth differentials, precautionary savings, lifecycle earnings profiles, and earnings variation across MSAs. Our results show that it is naive for researchers to take it for granted that individuals will provide unbiased information to household surveys given their demonstrated tendency of providing distorted reports of the same information to other administrative sources.

Subfields: Economics and Econometrics, Gender Studies

View Paper: https://www.semanticscholar.org/paper/65ad60c43f7c91705427c96acddb4bd16a08a522

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Citations in the corpus

The entrepreneurial earnings puzzle: Mismeasurement or real? (2014, methodology): “Researchers have since tried to relax these assumptions to indicate whether estimations are robust (Hurst et al., 2013; Lyssiotou et al., 2004; Tedds, 2010).”
Life Cycle Wage Growth across Countries (2017, background): “Second, it is well known that the reported incomeof the self-employed suffers from substantial underreporting (Hurst et al. 2014).”
Personality Traits of Entrepreneurs: A Review of Recent Literature (2018, unknown): “The challenges include underreporting of income by entrepreneurs (e.g., Hurst et al., 2014; Sarada, 2016), failure to capture the option value of entrepreneurship and the returns present in future wage employment (e.g., Manso, 2016; Dillon and Stanton, 2016; Galina and Hopenhayn, 2009; Kerr et al.,…”
Tax Compliance and Enforcement (2018, unknown): “…for Finland, Engström and Holmlund (2009) and Engström and Hagen (2015) for Sweden, Martinez-Lopez (2013) for Spain, Paulus (2015) for Estonia, and Hurst et al. (2014) for the United States. avoid the need to use survey data by instead using as the trace of income charitable donations reported on…”
Evidence of the invisible: toward a credibility revolution in the empirical analysis of tax evasion and the informal economy (2012, methodology): “This error would also affect the α coefficients if the bias or uR is correlated with BR, NR, or HR. 26 Recently, Hurst et al. (2010) have applied this methodology to examine income underreporting of self-employed individuals on surveys in the U.S. 27 The model also imposes a functional form…”