Self-employment income gap in Great Britain: How much and who?

Abstract

This paper utilises an expenditure survey-based data set that is rich in terms of observable characteristics to estimate the ‘income gap’ (defined to be one minus the proportion of reported to true income) of the self-employed in Great Britain. It also estimates the evasion response of the individual characteristics of the self-employed. It emerges that self-employed report, on average, around 80.4 percent of their income to the tax authority, which translates into an income-gap of 19.6 percent which varies significantly by sex, age, and region. In particular, male self-employed taxpayers underreport more than female ones, and they, in general, become more compliant as they age. Particular emphasis is paid to verifying that the income gap observed cannot be explained by other reasons than underreporting.