A fifth concern relates to the incidence and accuracy of tax filing by individuals and households, especially among low-income populations. This concern takes two forms: (1) whether people file any tax return, and (2) if they file, whether they report all sources of income to the IRS (or state taxing authorities).26 We consider each in turn.

If large fractions of low-income taxpayers do not file tax returns, then tax return data have very limited value. Unfortunately, there is not a lot of information on the filing propensities of people with low income. Information from the early 1990s (Scholz, 1994) suggests that 14 to 20 percent of those entitled to the earned income tax credit at the time failed to receive it, meaning that they failed to file tax returns.27 Later, we discuss one recent study on the tax filing propensities of a low-income population that sheds some preliminary light on this issue.

Among filing units, it is also possible that their members do not report all of their sources of income on their tax returns. For example, individuals may fail to file income received as independent contractors. Although firms or individuals who use independent contractors are obligated to report payments to such contractors to the IRS, failures to do this generally are difficult to detect. Again, we know little about the incidence of underreporting of various income sources for low-income populations.

To summarize, using tax return data to measure income and employment has several potential weaknesses. These are the following:

  • Gaining access to tax returns is difficult.

  • The data provide limited information on demographic and other characteristics.

  • Some low-income workers may not file, despite being eligible for the earned income tax credit, or may not report all their income.

Comparison of Income Reporting from UI Wage and IRS Tax Filings Data for a Low-Income Population

In a recent study of the EITC for a sample of assistance units on the California caseload, Hill et al. (1999) compared UI wage data with linked data from the

26  

If one is just interested in enumerating the population (as opposed to knowing incomes associated with families and individuals within the population), IRS data appear to be comprehensive. Sailer and Weber (1999) report that the IRS population count is 95.4 percent of the Census population count. The consistency is fairly good across gender, age, and state. Unfortunately, for many of the people enumerated, the IRS does not know anything about them other than that they exist.

27  

Cilke (1998) uses a CPS-IRS exact match file to examine the characteristics of people who are not required to file tax returns and actually did not file tax returns. The entire paper is presented as proportions, however, so it does not provide information on the absolute number of low-income families with earnings who fail to file.



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