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Estimation of Self-Employed Households’ Average Income Under-reporting in Iran

Fayaz Farkhad, Bita | 2014

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 45658 (44)
  4. University: Sharif University of Technology
  5. Department: Economics and Management
  6. Advisor(s): Barakchian, S.Mahdi
  7. Abstract:
  8. In this thesis, we quantify the extent to which the self-employed systematically under-report their income in Iran households survey by using expenditure based method. The method applied is an improvement of Pissarides and Weber (1989) method which is based on the Engel curve, describing the relationship between incomes and expenditures. In this method, we can estimate the exact amount of average underreporting instead of offering estimation interval.The relationship between incomes and expenditures of wage and salary workers is used 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 10.79 percent.
    In most of the surveys in this field, researchers try to estimate the amount of lost tax revenue; however, tax authorities prefer to be informed about the trend in results to make appropriate policy. That is why in this thesis we estimate the extent of estimation in successive years and among various careers. It is observable that highest amount of underreporting is among the directors. Furthermore, it seems that there is an ascending trend in these results in successive years. In this approach, it is assumed that salary workers are completely honest about their income, so we can estimate the amount of underreporting by self-employed which is theoretically and practically so week. For this, we devise an experiment to demonstrate how negative values for under-reporting can be visible in trends.
    In this approach, differences in the income-expenditure relationships between wage and salary workers and the self-employed are driven by the systematic underreporting of income by the self-employed, but there are other potential explanations for this expenditure gap. We can explain it by factors like Potential Systematic Differences in the Reporting of Expenditures, Differences in Hours Worked or Differences in Saving Propensities. We re-estimate our equation in different subcategories of expenditures with a log work hours and by segmenting the sample by age and across wealth quartiles. We can declare that our estimates are robust to taking these alternative explanations into account.
  9. Keywords:
  10. Income Under-Reporting of Self-Employed Households ; Tax Evasion ; Expenditure Based Method ; Engel Curve

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