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Payroll Taxes, Social Security and Informality. The 2012 Tax Reform in Colombia

Pablo Adrian Garlati Bertoldi ()

No 16722, Vniversitas Económica from Universidad Javeriana - Bogotá

Abstract: I evaluate how the drastic reduction in payroll taxes in 2012 reduced informality in Colombia. By the end of 2012 the Colombian government implemented a tax reform that, among other things, substantially reduced payroll taxes. I evaluate the effect of this reform on informality both theoretically and empirically. Theoretically, I develop a labor market model incorporating the changes introduced by the reform. As the reduction in payroll taxes was accompanied by a change in social trans-fers' funding, which led to uncertain changes in profits and social benefits, straightforward predictions on informality are not possible. Empirically, I obtain difference-in-difference (DID) estimates from two household surveys- one composed by many repeated cross sections across many years and the other a much shorter panel dataset. Estimates from the repeated cross sections data indicate small, short-term effects and large long-term effects. Industry was the first sector to enjoy a reduction in informality, followed by services and agriculture. For workers earning around one minimum wage, I find large point estimates. Estimates from the household survey panel data are in line with these results.

Keywords: informality; payroll taxes; social security; Colombia (search for similar items in EconPapers)
JEL-codes: D21 H24 H30 J32 J38 J46 (search for similar items in EconPapers)
Pages: 33
Date: 2018-09-21
New Economics Papers: this item is included in nep-iue, nep-lma and nep-pbe
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