Paul L. Caron
Dean





Monday, November 28, 2022

Satterthwaite: Understanding Self-Employment Trends In Tax Data

Emily Satterthwaite (Georgetown; Google Scholar), What's Going on With Self-Employment? (JOTWELL) (reviewing Andrew Garin (Illinois; Google Scholar), Emilie Jackson (Michigan State; Google Scholar) & Dmitri Koustas (Chicago; Google Scholar), New Gig Work or Changes in Reporting? Understanding Self-Employment Trends in Tax Data):

Jotwell (2023)Are there more self-employed people, or not? IRS data shows a significant increase in the portion of the workforce reporting positive net income from self-employment on their tax returns. It rose by about 20 percent after 2000, peaking in 2014 at just under 12 percent. However, annual labor force surveys suggest that the self-employment rate has been flat since 2000. How can these two results be reconciled? This question motivates a terrific new paper by Andrew Garin, Emilie Jackson, and Dmitri Koustas entitled, New Gig Work or Changes in Reporting? Understanding Self-Employment Trends in Tax Data. ...

The correlation between reporting more self-employment income and eligibility for larger refundable tax credits could mean either a real labor supply response (individuals actually working more in a self-employed capacity) or a pure reporting response, whether related to fake or real self-employment income.

To disentangle real labor supply from pure reporting effects, the authors surmise that parents expecting a first child around the end of the year will face uncertainty about the year in which the birth will occur—and the corresponding EITC-eligibility status for that year—until the end of the year, at which point labor supply decisions for that year have already been made.  They then use a regression discontinuity approach in which they compare reported self-employment earnings for parents with first births that occur right before the end of a given tax year to those with births that occur right after the end of the tax year.

The new parents with first births in December provide strong evidence that there is a pure reporting response. ...

[T]he authors position their results as a cautionary tale about over-reliance on administrative data as compared to survey data. Beyond methodological implications, however, I worry that this paper might be seized upon by those who seek to justify high audit rates of EITC recipients. I take the opposite view: the authors’ estimate that only 20 percent of the pure reporting effect was from outright fabrication (rather than reduced underreporting of real income) seems low, not high. It is evidence that individuals have learned over time how the EITC system works, and and that they overwhelmingly comply. This seems like a very good thing for the tax system. The credits are being delivered in the vast majority of cases as Congress intended because self-employment income that should have been reported in the first place is now being reported. This might help taxpayers form a habit of full reporting of self-employment income that will hold even when tax credits are not at stake. Moreover, the IRS should want to understand the process by which EITC knowledge has disseminated over time so it can try to use those same channels for encouraging uptake of other government programs.

One can only hope that interested policymakers might read this paper carefully before jumping to conclusions about tax credit policy. It would be well worth their time.

https://taxprof.typepad.com/taxprof_blog/2022/11/satterthwaite-understanding-self-employment-trends-in-tax-data.html

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