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Payroll Taxes and the Labor Market: A Computable General Equilibrium Analysis

Gustavo Hernández

Latin American Journal of Economics-formerly Cuadernos de Economía, 2012, vol. 49, issue 1, 99-123

Abstract: This study uses a computable general equilibrium model to analyze the effects of eliminating Colombia’s parafiscal taxes, which finance social programs. In the model, these are substituted by alternative financing sources: VAT, indirect taxes or taxes on capital. The results show that elimination of parafiscal taxes produces a one percentage point decrease in the unemployment rate, as long as these are not substituted by other taxes. However, when other taxes are substituted for parafiscal taxes, there may not be any effect on the unemployment rate. This implies that eliminating parafiscal taxes does not produce the effects expected by a partial equilibrium analysis, that is, a significant reduction in the unemployment rate.

Keywords: Payroll taxes; applied general equilibrium; tax replacement (search for similar items in EconPapers)
JEL-codes: C68 H22 J31 (search for similar items in EconPapers)
Date: 2012
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Latin American Journal of Economics-formerly Cuadernos de Economía is currently edited by Raimundo Soto

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Handle: RePEc:ioe:cuadec:v:49:y:2012:i:1:p:99-123