anonymous referees, and participants at the TransAtlantic Public Economics Seminar held June 1991 in Munich. We are also grateful for the extra efforts of Joel Stubbs at the IRS. This paper is part of the NBER's research program in Public Economics. Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research.

The efficiency cost of capital misallocations between the corporate sector and the noncorporate sector is typically measured using statutory tax differences. Corporate-source income tax compliance is high because of third party reporting, however, while noncorporate rental income tax compliance is low. Differential evasion thus exacerbates statutory differences and enlarges the efficiency cost. To measure this effect, we build a numerical general equilibrium model where households simultaneously choose portfolios of risky assets and fractions of income to report.

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