Self-employment income tax evasion and inequality

This paper provides new evidence on the extent and impact of income tax evasion by the self-employed, using a novel dataset that links a household income survey with tax administration records in Italy. We find that the share of unreported income among self-employed households is approximately one-third of total income, similar to what has been documented for other countries with lower aggregate tax evasion rates. We show that income tax evasion primarily originates from liberal professionals, who underreport their income by about twice as much as small entrepreneurs. The results suggest that the high level of aggregate tax evasion in Italy is a consequence of the economic structure rather than differences in individual tax evasion propensities or social norms. Our distributional analysis reveals the negative impact of evasion on vertical and horizontal equity, as well as the increased unequal distribution of the tax burden across households. JEL Classification: H26 , H31 , D31