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.



More About This Work

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