Do the Wealthy Underreport Their Income? Using General Election Filings to Study the Income–Wealth Relationship in India

ABSTRACT

To examine the income‐reporting behavior of individuals and households across wealth groups in India, we use new and publicly available information in election filings, along with Forbes' list and income tax data. We find that the wealthier a household is, the smaller the income it reports relative to its wealth. On average, a 1% increase in family wealth is associated with a more than 0.6% decrease in the reported income–wealth ratio. The income–wealth ratios for individuals exhibit very similar patterns. We show that tax avoidance is an important factor behind the abnormally low capital income reported by the top wealth groups. We use the national income accounts to estimate the capital income missing from tax returns. We find the average return on capital in India to be 7.2%. In contrast, the total income reported by the wealthiest 0.1% of families is only about a fifth of the returns from their capital. For the Forbes‐listed 100 families, an even higher fraction of capital income goes unreported. We demonstrate how the missing income makes the tax regime regressive with respect to wealth and results in an underestimate of inequality. Finally, we show that women report relatively less income, and individuals exposed to greater media and civil society scrutiny report relatively high incomes.