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

Deza Delgado, María Cecilia, Holguer Xavier Jara Tamayo, Oliva, Nicolás and Javier Torres

No EM8/20, EUROMOD Working Papers from EUROMOD at the Institute for Social and Economic Research

Abstract: The aim of this paper is twofold. First, it provides a comprehensive assessment of the financial cost informal workers would incur if they entered formal employment 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. Our results show a wide variation in formalization tax rates ranging between 8.5 percent in Venezuela and 65 percent in Colombia. Formalization costs are particularly high for self-employed informal workers, and mainly driven by the burden associated to social insurance contribution payments. 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 and would reduce inequality. The comparative analysis highlights the possibility of adopting strategies to reduce the financial burden to formalization of certain population groups in the region.

Date: 2020-05-18
New Economics Papers: this item is included in nep-iue, nep-lam and nep-pbe
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