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

Author

Listed:
  • H. Xavier Jara

    (University of Essex)

  • María Cecilia Deza Delgado

    (Inter-American Development Bank)

  • Nicolás Oliva

    (Universitat Autònoma de Barcelona)

  • Javier Torres

    (Universidad del Pacífico)

Abstract

The aim of this paper is twofold. First, it provides a comprehensive assessment of the financial disincentives to enter formal employment implied by the design of the tax-benefit system 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 in the region. The results show a wide variation in financial disincentives to enter formal employment, with formalization tax rates ranging between 8.5 percent in Venezuela and 42 percent in Colombia. Formalization tax rates are particularly high for self-employed informal workers, and mainly driven by the high costs associated with social insurance contributions. The analysis further shows that potential entries to formal employment would raise tax revenue in all countries, but mainly through the effect of increased social insurance contributions, whereas personal income tax revenue would have a marginal contribution, except in Bolivia and Venezuela. 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.

Suggested Citation

  • H. Xavier Jara & María Cecilia Deza Delgado & Nicolás Oliva & Javier Torres, 2023. "Financial disincentives to formal employment and tax-benefit systems in Latin America," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(1), pages 69-113, February.
    • Handle: RePEc:kap:itaxpf:v:30:y:2023:i:1:d:10.1007_s10797-021-09724-8
    DOI: 10.1007/s10797-021-09724-8
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    More about this item

    Keywords

    Taxes; Informality; Fiscal capacity; Inequality; Microsimulation;
    All these keywords.

    JEL classification:

    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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