The impact of lowering the payroll tax on informality in Colombia

Cristina Fernandez (cristinafernandezmejia@gmail.com) and Leonardo Villar

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In 2012, the Colombian Government reduced employer payroll contributions from 29.5 to 16.0 percent. Two years later, the informality rate had diminished by about 4.0 percentage points. This paper attempts to estimate how much of this reduction was due to the tax reform, isolating the impact of other macroeconomic variables. A natural approach to performing this task is to apply a difference-in-differences methodology using a household survey panel. Since the Colombian survey does not have a panel structure, we simulated one using a matching difference-in-differences methodology. According to the results, the tax reform is associated with a 4.8-percentage-point decrease in the informality of workers affected by the reform in the thirteen main metropolitan areas. This represents approximately half the reduction of the relevant informality rate during that period, affecting mostly salaried men and workers in general with low levels of education.

Keywords: informal markets; payroll taxes; matching; difference-in-differences (search for similar items in EconPapers)
JEL-codes: C21 H23 J40 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2017-10-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Economía, 1, October, 2017, 18(1), pp. 125 - 155. ISSN: 1529-7470

Downloads: (external link)
http://eprints.lse.ac.uk/123094/ Open access version. (application/pdf)

Related works:
Journal Article: The Impact of Lowering the Payroll Tax on Informality in Colombia (2017)
Working Paper: The impact of lowering the payroll tax on informality in Colombia (2016)
Working Paper: The impact of lowering the payroll tax on informality in Colombia (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:123094

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