Payments Under the Table: Employer-Employee Collusion in Brazil

• In Event: Tax Enforcement and Wage Reporting

Abstract

We study formal workers who receive part of their salary off-the-books, which we refer to as "payments under the table" (PUT). First, we report results from an original representative survey of formal sector workers in Brazil to document novel empirical facts about the scope and economic significance of PUTs. A quarter of formal employees admit to receiving PUTs for about 20% of their wages, with higher-wage workers under-reporting a larger share of their income. Conservative estimates imply that PUTs generate significant revenue losses for the government, totaling at least 4.7% of labor income taxes and 2.3% of social security contributions. Second, guided by a Nash Bargaining framework, we study how employers' and employees' incentives shape collusive PUT. On the employer side, we leverage novel data on PUT-related labor lawsuits matched to employer-employee records to show that employers increase the reported wages of other employees by 1% in response to a PUT-related lawsuit. The mechanisms are consistent with an increase in employers' perception of risk, and the effects are modest relative to a full-compliance benchmark. On the employee side, we study the ceiling in the social security system, which breaks the link between wage reporting and pension benefits. We show bunching evidence revealing that employers collusively adjust PUTs to report employees' wages up to the ceiling. Overall, these findings challenge existing assumptions about the effectiveness of third-party reporting in developing countries and suggest the need for new policy tools to improve the efficiency and fairness of tax systems.

Author

• Javier Feinmann, UC Berkeley