The Elasticity of Informality to Taxes and Transfers

Jorge Alonso-Ortiz () and Julio Leal Ordóñez

MPRA Paper from University Library of Munich, Germany

Abstract: In this work we study the impact on the size of the informal sector of a tax levied on formal workers, and transfers that may be distributed to both formal and informal workers alike. We build a search model that features an informal sector and we calibrate it to data from Mex- ico. We investigate whether changes in size and distribution of transfers between formal and informal workers have a significant impact on the size of the informal sector. We find that changes in the distribution, for a given size, create a range of variation of 19.35pp. Analogously, changes in size create a range of variation of 5.7pp, resulting in a total range of variation of 51.2pp. This implies that it is possible to substantially increase formalization by rising extra tax resources as long as they accrue to formal workers. We illustrate the validity of our approach simulating the introduction of Seguro Popular.

Keywords: Informal Sector; Search; Tax and Transfer Programs; Seguro Popular (search for similar items in EconPapers)
JEL-codes: E24 E26 E62 J64 J65 (search for similar items in EconPapers)
Date: 2013-08-22
New Economics Papers: this item is included in nep-iue, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: The elasticity of Informality to Taxes and tranfers (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:49568

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