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Are Household Surveys Like Tax Forms? Evidence from Income Underreporting of the Self-Employed

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  • Erik Hurst

    (University of Chicago)

  • Geng Li

    (Board of Governors of the Federal Reserve System)

  • Benjamin Pugsley

    (Federal Reserve Bank of New York)

Abstract

A large literature shows 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. 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. On average, the self-employed underreport their income by about 25%. We show that failing to account for such income underreporting leads to biased conclusions in a variety of settings. © No rights reserved. This work was authored as part of the Contributor's official duties as an Employee of the United States Government and is therefore a work of the United States Government. In accordance with 17 U.S.C. 105, no copyright protection is available for such works under U.S. law.

Suggested Citation

  • 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.
    • Handle: RePEc:tpr:restat:v:96:y:2014:i:1:p:19-33
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    More about this item

    Keywords

    household surveys; self-employment; income; taxes;
    All these keywords.

    JEL classification:

    • C80 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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