Local Corruption and Misreported Income: Evidence from the Earned Income Tax Credit

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http://hdl.handle.net/11603/30712

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UMBC Economics Department

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https://orcid.org/0000-0001-5117-9918

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2017-07-07

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Abstract

We study the relationship between local corruption and income misreporting in the context of the EITC program. Using a newly assembled dataset of corruption at the MSA level, we observe that public officials’ corruption predicts more than 70% of the variation in bunching in the distribution of EITC-eligible self-employed workers’ reported income. Using a research design that exploits exogenous variation in institutional accountability, we find that a one standard deviation rise in our corruption measure causes sharp bunching among self-employed to increase by 0.60 to 0.83 standard deviations. This is consistent with a behavioral model that embeds social stigma.