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

44 Pages Posted: 30 Aug 2013 Last revised: 20 Jun 2022

See all articles by Todd Kumler

Todd Kumler

Columbia University

Eric A. Verhoogen

Columbia University - School of International & Public Affairs (SIPA); IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Judith A. Frías

Instituto Mexicano del Seguro Social (IMSS)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2013

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.

Suggested Citation

Kumler, Todd and Verhoogen, Eric A. and Frías, Judith A., Enlisting Employees in Improving Payroll-Tax Compliance: Evidence from Mexico (August 2013). NBER Working Paper No. w19385, Available at SSRN: https://ssrn.com/abstract=2318287

Todd Kumler (Contact Author)

Columbia University ( email )

New York, NY 10027
United States

Eric A. Verhoogen

Columbia University - School of International & Public Affairs (SIPA) ( email )

420 West 118th Street
New York, NY 10027
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Judith A. Frías

Instituto Mexicano del Seguro Social (IMSS) ( email )

Paseo de la Reforma No. 476
Col. Juárez, México D.F. 06600
Mexico

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
19
Abstract Views
331
PlumX Metrics