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Enlisting Employees in Improving Payroll-Tax Compliance: Evidence from Mexico

Todd Kumler, Eric Verhoogen () and Judith A. Frías

No 19385, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A growing body of research suggests that difficulties in collecting taxes are an important constraint on economic performance in developing countries. Evidence from rich countries points to third- party reporting — in particular, employer reports of employees' wages — as a potential remedy. To what extent does the accuracy of third-party reporting carry over to developing countries, with their weaker enforcement regimes? In this paper, we compare two sources of wage information from Mexico — firms' reports of individuals' wages to the Mexican social security agency and individuals' responses to a household labor-force survey — to investigate the extent of wage under-reporting by formal firms and how it responded to an important change in the social security system. We document that under-reporting is extensive, and that compliance is better in larger firms. Using a difference-in-differences strategy based on the 1997 Mexican pension reform, which effectively tied pension benefits more closely to reported wages for younger workers than for older workers, we show that the reform led to a relative decline in under-reporting for younger age groups. This result reinforces the view that the discrepancies between the two data sources can be interpreted as evidence of evasion, and suggests that giving employees incentives and information to improve the accuracy of employer reports can be an effective way to improve payroll-tax compliance.

JEL-codes: H26 H55 O17 (search for similar items in EconPapers)
Date: 2013-08
Note: DEV LS PE
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Published as Todd Kumler & Eric Verhoogen & Judith Frías, 2020. "Enlisting Employees in Improving Payroll Tax Compliance: Evidence from Mexico," The Review of Economics and Statistics, vol 102(5), pages 881-896.

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