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Aggregate Effects of a Universal Social Insurance Fiscal Reform

Arturo Antón-Sarabia () and Julio Leal Ordóñez

No 2015-04, Working Papers from Banco de México

Abstract: In a typical developing country, coverage of the contributory social security system is low. We analyze the aggregate effects of a revenue-neutral fiscal-cum-social policy reform that consists of: 1) the implementation of universal social insurance to replace the system with low coverage; and 2) the elimination of the social security payroll tax to replace it with a generalized VAT. We find that this reform increases productivity by 2 percent and output by 3 percent as it improves the allocation of resources across firms and sectors, and generates a substantial change in occupational choices. Thus, wages (before transfers) increase for all employees. Also, due to the reconfiguration of transfers, earnings (wages after transfers) for informal employees increase relative to the earnings of formal employees, which decreases inequality. However, the reform could affect some groups in the population, given the regressive nature of VAT and heterogeneity in the valuation of transfers across workers.

Keywords: Universal Social Insurance; Fiscal Reform; Inequality; VAT; Allocation of Resources across Firms and Sectors. (search for similar items in EconPapers)
JEL-codes: E62 H55 O17 O47 (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-age, nep-ias, nep-iue, nep-mac and nep-pbe
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Working Paper: Aggregate Effects of a Universal Social Insurance Fiscal Reform (2013) Downloads
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