Enlisting Workers in Monitoring Firms: Payroll Tax Compliance in Mexico
Todd Johnson Kumler; Eric A. Verhoogen; Judith Frias
- Enlisting Workers in Monitoring Firms: Payroll Tax Compliance in Mexico
Kumler, Todd Johnson
Verhoogen, Eric A.
- Working papers
- Permanent URL:
- Department of Economics Discussion Papers
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- Department of Economics, Columbia University
- Publisher Location:
- New York
- Non-compliance of firms with tax regulations is a major constraint on state capacity in developing countries. We focus on an arguably under-appreciated dimension of non-compliance: under-reporting of wages by formal firms to evade payroll taxes. Comparing wage distributions for similar sets of workers in the administrative records of the Mexican social security agency and a household labor-force survey, we document extensive under-reporting of wages. We further argue that the 1997 Mexican pension reform had a differential effect by age on the incentives of workers to ensure that their wages were reported accurately. Using a difference-in-differences strategy, we present evidence that the increase in the incentive for workers to ensure accurate reports led to a significant decline in under-reporting. The results suggest that enlisting workers in monitoring their employers is an effective way to increase payroll tax compliance.
- Economics, Labor
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