• Thomas S. Coleman
• David Weisbach

2026

Public Law & Legal Theory Research

To estimate inequality from tax data, researchers must allocate misreported income (e.g., evasion) to individuals. Misreported income, however, is not di- rectly observed. Recovering true income therefore requires identifying assump- tions about the joint distribution of true income and reporting, and these assump- tions can substantially change estimated top income shares. A central reason is that membership in the reported top group is selected on compliance, an un- observable, so the composition of the reported top depends on assumptions the data alone cannot settle. We develop a computational framework that makes these assumptions explicit and clarifies how they shape estimates of inequality.

We show that reported income inequality may exceed true income inequal- ity, as measured by both top income shares and the Gini coe!cient, across a broad range of assumptions. This can occur even when evasion is concentrated among top income groups, provided that misreporting is sufficiently heterogeneous within income classes. Because of selection on compliance, high-income individuals who evade drop out of the reported top group, while more compliant individuals move in. The reported top group is therefore disproportionately com- posed of compliant individuals, increasing reported top shares relative to true top shares. Approaches that restrict within-income heterogeneity implicitly rule out this selection effect and may bias conclusions about the level of inequality.

Coleman, Thomas S. and Weisbach, David, "The Effects of Tax Evasion on Inequality" (2026). Public Law and Legal Theory Working Papers. .
https://chicagounbound.uchicago.edu/public_law_and_legal_theory/994

DOWNLOADS

Since October 19, 2026