Estimating the Income Reporting Function for the Self-Employed

There is considerable interest in measuring tax noncompliance using microeconomic data. One such method estimates income under-reporting by self-employed households by assuming a known, parametric form of the Engel curve and making the further parametric assumption that self-employed households under-report their income by a constant fraction, independent of income. This paper proposes a nonparametric approach which avoids functional form restrictions and allows the form of the reporting function to be uncovered rather than being imposed a priori. The approach is illustrated by estimating the effect of the Canadian Goods and Services Tax on income under-reporting by a sample of self-employed households