Using Public Information to Estimate Self‐Employment Earnings of Informal Suppliers

In: Public budgeting & finance, Volume 36, Issue 1, p. 22-46

Abstract

An enduring problem in the analysis of tax evasion is the difficulty of its measurement. An especially troublesome component of tax evasion arises from informal suppliers, such as self‐employed domestic workers, street‐side vendors, and moonlighting tradesmen. We develop in this paper a new approach for estimating self‐employment earnings of informal suppliers. Our methodology involves using national survey results on self‐employment earnings within a carefully selected set of industry categories where informal activities are concentrated. Then, by comparing these national survey results on self‐employment earnings to Internal Revenue Service statistics on the amounts actually reported for tax purposes, it is possible to estimate the extent of noncompliance within the selected industry categories. Our methodology relies on survey respondents being reasonably forthcoming about their earnings, which we are able to confirm through some validation exercises.