Despite a series of tax reforms and various tax audits, tax evasion among high-income self-employed taxpayers remains high, and the marginal effect on tax revenues as a result of such reforms has been gradually shrinking. This paper estimated the income under-reporting rate among self-employed taxpayers based on income level by income decile, and sought to produce enhanced estimates using several methods. First, while estimating tax revenues through the Household Income and Expenditure Survey (HIES) conducted by the Statistics Korea, we tried to apply the income tax code as accurately as possible rather than rely on assumptions, seeking to reduce the gap between actual and estimated tax revenues. Moreover, it was posited that the income under-reporting rate would vary in line with income level. Also, by estimating income under-reporting rates over a longer period of 10 years, from 2003 to 2012, the time series reflected more recent data than existing research, allowing for a more consistent comparison of estimates.
In this study, using Statistics Korea household survey data (HIES) from 2003 to 2012, we estimated the income under-reporting rate using the income function estimation method. The results of our analysis showed that the overall income under-reporting rate among self-employed taxpayers was decreasing, from about 25% in 2003 to 21% in 2012. As shown in previous studies, between 2003 and 2008 the rate fluctuated without demonstrating any clear trend, but beginning in 2008 the rate steadily decreased, with the exception of 2011.
The income under-reporting and income tax evasion rates of self-employed taxpayers were found to be higher among the high- and low-income brackets than the middle-income bracket, but more recently, the under-reporting rates tended to be more proportional to income level. Based on these findings, we can assume that among the high-income bracket the benefits of tax evasion may exceed the costs, and that with the introduction of the earned income tax credit (EITC) program and implementation of an Oil Price Refund policy in 2008 and 2009 to support low-income families, the earnings levels of low-income households may have been more accurately revealed. In addition, the tax evasion rate in the low-income bracket may have been estimated as higher than in the high-income bracket due to the small value of “estimated earnings” in the denominator of the low-income bracket’s under-reported income rate.
The average amount of aggregate income tax evasion is estimated at KRW 2,078,000 per head of household in 2012. The annual growth rate of the per-capita income tax evasion amount from 2003 to 2012 was 2.1%, which is lower than the annual growth rate of per-capita income tax during that period, 8.2%.
The income tax evasion rate among the high-income bracket fell sharply from 2003 to 2012 but was still high relative to the low-income bracket in 2012. Therefore, to effectively reduce the income under-reporting rate, tax administrators should focus on high-income bracket self-employed taxpayers.
In this study, using Statistics Korea household survey data (HIES) from 2003 to 2012, we estimated the income under-reporting rate using the income function estimation method. The results of our analysis showed that the overall income under-reporting rate among self-employed taxpayers was decreasing, from about 25% in 2003 to 21% in 2012. As shown in previous studies, between 2003 and 2008 the rate fluctuated without demonstrating any clear trend, but beginning in 2008 the rate steadily decreased, with the exception of 2011.
The income under-reporting and income tax evasion rates of self-employed taxpayers were found to be higher among the high- and low-income brackets than the middle-income bracket, but more recently, the under-reporting rates tended to be more proportional to income level. Based on these findings, we can assume that among the high-income bracket the benefits of tax evasion may exceed the costs, and that with the introduction of the earned income tax credit (EITC) program and implementation of an Oil Price Refund policy in 2008 and 2009 to support low-income families, the earnings levels of low-income households may have been more accurately revealed. In addition, the tax evasion rate in the low-income bracket may have been estimated as higher than in the high-income bracket due to the small value of “estimated earnings” in the denominator of the low-income bracket’s under-reported income rate.
The average amount of aggregate income tax evasion is estimated at KRW 2,078,000 per head of household in 2012. The annual growth rate of the per-capita income tax evasion amount from 2003 to 2012 was 2.1%, which is lower than the annual growth rate of per-capita income tax during that period, 8.2%.
The income tax evasion rate among the high-income bracket fell sharply from 2003 to 2012 but was still high relative to the low-income bracket in 2012. Therefore, to effectively reduce the income under-reporting rate, tax administrators should focus on high-income bracket self-employed taxpayers.