Financial disincentives to formal employment and tax-benefit systems in Latin America

H. Xavier Jara, María Cecilia Deza Delgado, Nicolás Oliva and Javier Torres
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María Cecilia Deza Delgado: Inter-American Development Bank
Nicolás Oliva: Universitat Autònoma de Barcelona

International Tax and Public Finance, 2023, vol. 30, issue 1, No 4, 69-113

Abstract: Abstract The aim of this paper is twofold. First, it provides a comprehensive assessment of the financial disincentives to enter formal employment implied by the design of the tax-benefit system in five Latin American countries: Bolivia, Colombia, Ecuador, Peru, and Venezuela. Then, it analyzes the extent to which formalizing informal workers would contribute to increase fiscal capacity in the region. The results show a wide variation in financial disincentives to enter formal employment, with formalization tax rates ranging between 8.5 percent in Venezuela and 42 percent in Colombia. Formalization tax rates are particularly high for self-employed informal workers, and mainly driven by the high costs associated with social insurance contributions. The analysis further shows that potential entries to formal employment would raise tax revenue in all countries, but mainly through the effect of increased social insurance contributions, whereas personal income tax revenue would have a marginal contribution, except in Bolivia and Venezuela. Interestingly, potential formalization of informal workers with the highest probability of being formal would allow capturing a substantial share of the additional tax revenue lost due to informality.

Keywords: Taxes; Informality; Fiscal capacity; Inequality; Microsimulation (search for similar items in EconPapers)
JEL-codes: D13 H24 I32 I38 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Financial disincentives to formal employment and tax-benefit systems in Latin America (2020)
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DOI: 10.1007/s10797-021-09724-8

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