Are survey-based self-employment income underreporting estimates biased? New evidence from matched register and survey data

Abstract

Estimates from studies of income underreporting (the proportion of undeclared to true income) by the self-employed using the ‘Engel curve’ approach of Pissarides and Weber (PW; J Public Econ 39(1):17–32, 1989) have been based predominantly on survey data on incomes and expenditures. This paper uses a unique dataset, from New Zealand, that matches survey data on household incomes with administrative tax register data for the same households. This allows us to measure evasion under different incentives for misreporting—official tax returns and an independent statistical survey—and to quantify the impact of measurement error in survey-reported incomes on underreporting estimates. We find that using tax return data leads to robust estimates of income underreporting by the self-employed of around 20% on average. By contrast, estimates are only around half as large when based on survey data. This result reflects both measurement error in, and attenuation biases arising from, survey-reported incomes. The former appear to account for much of the difference. If self-employed survey reporting in other countries demonstrates similar differences from equivalent tax records—as seems likely a priori—then many previous estimates of self-employment income underreporting based on the PW approach may be biased downwards.