Research / BFI Working PaperApr 30, 2024

New Gig Work or Changes in Reporting? Understanding Self-Employment Trends in Tax Data

Andrew Garin, Emilie Jackson, Dmitri Koustas

Rising self-employment rates in U.S. tax data that are absent in survey data have led to speculation that tax records capture a rise in new “gig” work that surveys miss. Drawing on the universe of IRS tax returns, we show that trends in firm-reported payments to “gig” and other contract workers do not explain the rise in self-employment reported to the IRS; rather, that increase is driven by self-reported earnings of individuals in the EITC phase-in range. We isolate pure reporting responses from real labor supply responses by examining births of workers’ first children around an end-of-year cutoff for credit eligibility that creates exogenous variation in tax rates at the end of the tax year after labor supply decisions are already sunk. We find that exposing workers with sunk labor supply to negative marginal tax rates results in large increases in their propensity to self-report self-employment—only a small minority of which leads to bunching at kink-points. Consistent with pure strategic reporting behavior, we find no impact on reporting among taxpayers with no incentive to report additional income and no effects on firm-reported payments of any kind. Moreover, we find these reporting responses have grown over time as knowledge of tax incentives has become widespread. Quantification exercises suggest that changes in taxpayer reporting behavior are a major driver of discrepancies between self-employment trends in self-reported and third-party reported data. Our findings suggest caution is warranted before deferring to self-reported tax data over other data sources when measuring labor market trends.

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