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Fiscal policy and informality in Colombia

García-Suaza, A (), M Gómez () and Fernando Jaramillo ()
Authors registered in the RePEc Author Service: Andres Garcia-Suaza ()

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Abstract: This paper studies how informality reacts to fiscal policy instruments. We develop an analytical framework with a dual labor market with frictions, where the formal sector, in contrast to the informal sector, produces with technology using capital and pay taxes. We calibrate the model for the Colombian economy and quantify to what extent a decrease in payroll taxes is effective to create formal jobs in a context where government compensates for the reduction in revenues by using other fiscal instruments, such as reducing expenditure or increasing other taxes, e.g., consumption or capital income taxes.

Keywords: Informality; occupational choice; payroll taxes; fiscal policy (search for similar items in EconPapers)
JEL-codes: E24 E62 J01 J21 J32 (search for similar items in EconPapers)
Pages: 31
Date: 2021-06-28
New Economics Papers: this item is included in nep-dge, nep-iue, nep-lam, nep-lma and nep-mac
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