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Enlisting Workers in Monitoring Firms: Payroll Tax Compliance in Mexico

Kumler, Todd Johnson; Verhoogen, Eric A.; Frias, Judith

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.

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Academic Units
Economics
Publisher
Department of Economics, Columbia University
Series
Department of Economics Discussion Papers, 1112-07
Published Here
June 29, 2012
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