Developing countries face challenges in establishing efficient and progressive tax systems. This translates not only into low revenue collection but also into a tax system more dependent on indirect taxation. Latin American and Caribbean (LAC) governments collect, on average, revenues for 21.1% of the GDP compared to 34.2% in OECD countries. Among the collected revenues, OECD countries double direct taxes such as income taxes and social security contributions (SSC) compared to LAC countries. The existing evidence suggests that the gap in tax collection between developed and developing countries is caused less by the choice of low tax rates and more by the challenges associated with informality and misreporting by both workers and firms (Besley & Persson 2009, Bachas et al. 2024). Several papers have studied how to reduce informality from non-registered establishments. However, little is known about addressing layers of informality within registered establishments: informal employees in registered establishments and even formal employees in registered establishments can receive part of their wages paid off-the-books, which we referred to as "Payments Under the Table" (PUTs), following previous work shown in Feinmann et al. (2022). The objective of this study is to find novel methods to combat informality in formal enterprises.
The study consists of a series of messages sent to firms, designed to highlight the potential risks associated with engaging in tax evasion schemes. It is conducted in collaboration with the Dirección Nacional de Impuestos Internos (DGII), the tax authority of the Dominican Republic. The study will be performed during the second semester of 2024 and will include 67,570 firms representing the entire universe of formal enterprises in the Dominican Republic's private sector. The experiment includes two types of messages: an "awareness" intervention, which highlights the recent rise in labour lawsuits and reminds firms of the risk that employees might report them to labour courts; and a "propagation" intervention, which adds that the tax authority may use labour lawsuits to trigger tax audits. Both messages urge firms to cease informal practices and outline the laws included in the Labour and Tax Codes which are being broken when hiring workers off-the-books.
This experiment contributes to the literature by experimentally testing interventions designed to reduce PUTs and informality in registered firms. Specifically, we explore how deterrence messages from the tax authority, incorporating information on labour lawsuits, affect firms' behaviour regarding underreported wages. The insights gained from this experiment have the potential to influence not only policy in the Dominican Republic but also in other countries facing similar challenges. The experimental design, which focuses on leveraging both legal mechanisms (e.g., labour lawsuits) and the threat of audits to incentivise compliance, is inherently adaptable. While the Dominican Republic's context—characterised by high informality and specific legal structures— provides the immediate testing ground, the core principles can be modified for application in other countries with varying legal and economic environments, especially in low-income countries. This adaptability enhances the potential for the intervention's scalability across different regions.
