Brazilian tax collection reform and its effects

The reform provides monetary compensation to the collectors based on their individual and group performance in finding and collecting taxes from tax evaders. The size of the rewards is quite significant: incentive bonuses frequently constitute more than half of the pay of individuals in the collection agency. We find evidence that instituting the plan did influence incentives both at the group and at the individual level. Overall, productivity in collecting delinquent taxes declined over the period; however, the decline was least in low-value added areas and sectors and greatest in high value-added areas and sectors. The overall decline is probably partly illusory -- extreme inflation rates at the beginning of our period probably distort the data -- and partly due to a secular shift in the difficulty of finding evaders. The relative movements in productivity apparently stem from two sources: a shift of resources within the collection authority away from lower productivity activities towards higher productivity activities, and a stronger incentive effect from the reform on low value-added activities and sectors. (Author abstract)