Enlisting Workers in Monitoring Firms: Payroll Tax Compliance in Mexico

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