Working Paper: CEPR ID: DP10483
Authors: Tom Lichard; Jan Hanousek; Randall K. Filer
Abstract: We develop an estimator of unreported income that relies on much more flexible identifying assumptions than those underlying previous estimators of the shadow economy using household-level data. Assuming only that evading households have a higher consumption-income gap than non-evaders in surveys, an endogenous switching model with unknown sample separation enables the estimation of both the probability of hiding income and the expected amount of unreported income for each household. Using data from Czech and Slovak household budget surveys, we find the size of the shadow economy to be substantially larger than estimated using other techniques. These results are robust under a number of alternative specifications.
Keywords: Consumption-Income Gap; Tax Evasion; Underreporting
JEL Codes: H26; J46; O17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| households evading taxes (H26) | higher consumption-income gap (F61) |
| endogenous switching regression model (C34) | size of the shadow economy (E26) |
| underreporting among wage and salary workers (J31) | larger estimates of shadow economy (E26) |
| ignoring hidden income (H26) | serious underestimations and distortions in observed income distributions (D31) |