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Employment and Taxes in Latin America: An Empirical Study of the Effects of Payroll, Corporate Income and Value-Added Taxes on Labor Outcomes

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  • Lora, Eduardo
  • Fajardo, Johanna

Abstract

This paper empirically explores the effects of payroll taxes, value-added taxes and corporate income taxes on a variety of labor market outcomes such as employment, unemployment, informality, and wages. Using national-level data on labor variables for 15 Latin American countries, the results indicate that the effects of each tax are distinctly different and may depend on several aspects of labor and tax institutions. Payroll taxes reduce employment and increase labor costs when their benefits are not valued by workers, but otherwise increase labor participation and do not raise labor costs. Value-added taxes increase informality and reduce skilled labor demand. In contrast, corporate income taxes may help reduce informality, especially among low-education workers but, when tax enforcement capabilities are strong, may reduce labor participation and employment of medium- and high-education workers.

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  • Lora, Eduardo & Fajardo, Johanna, 2012. "Employment and Taxes in Latin America: An Empirical Study of the Effects of Payroll, Corporate Income and Value-Added Taxes on Labor Outcomes," IDB Publications (Working Papers) 4078, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:4078
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    Cited by:

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    2. Sean Higgins & Nora Lustig & Whitney Ruble & Timothy Smeeding, 2013. "Comparing the incidence of taxes and social spending in Brazil and the United States," Commitment to Equity (CEQ) Working Paper Series 1316, Tulane University, Department of Economics.
    3. Saraçoğlu, Dürdane Şirin, 2020. "Do labour market policies reduce the informal economy more effectively than enforcement and deterrence?," Journal of Policy Modeling, Elsevier, vol. 42(3), pages 679-698.
    4. Cristina Fernández & Leonardo Villar, 2016. "A Taxonomy of Colombia’s Informal Labor Market," Coyuntura Económica, Fedesarrollo, vol. 46(1), pages 15-50, June.
    5. McKay Andy & Pirttilä Jukka & Schimanski Caroline, 2018. "The Elasticity of Formal Work in African Countries," Working Papers 1820, Tampere University, Faculty of Management and Business, Economics.
    6. Esteban-Pretel, Julen & Kitao, Sagiri, 2021. "Labor Market Policies in a Dual Economy," Labour Economics, Elsevier, vol. 68(C).
    7. Agénor, Pierre-Richard & Lim, King Yoong, 2018. "Unemployment, growth and welfare effects of labor market reforms," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 19-38.
    8. Leonardo Fabio Morales & Carlos Medina, 2017. "Assessing the Effect of Payroll Taxes on Formal Employment: The Case of the 2012 Tax Reform in Colombia," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2017), pages 75-124, November.
    9. Sean Higgins, Nora Lustig, Whitney Ruble, and Timothy Smeeding, 2014. "Comparing the Incidence of Taxes and Social Spending in Brazil and the United States - Working Paper 360," Working Papers 360, Center for Global Development.
    10. Antón, Arturo & Leal, Julio, 2013. "Aggregate Effects of a Universal Social Insurance Fiscal Reform," IDB Publications (Working Papers) 4580, Inter-American Development Bank.
    11. Andy McKay & Jukka Pirttilä & Caroline Schimanski, 2019. "The tax elasticity of formal work in African countries," WIDER Working Paper Series wp-2019-69, World Institute for Development Economic Research (UNU-WIDER).
    12. Zhao, Fang & Xu, Jiayi & Fang, Guanfu, 2022. "The heterogeneous effects of employment-based pension policies on employment: Evidence from urban China," Journal of Asian Economics, Elsevier, vol. 78(C).
    13. Zuo, Shengqiang & Wu, Bangzheng & Feng, Jun, 2023. "Does government reduction of the corporate income tax rate increase employment? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 365-372.
    14. Luis E. Arango & Luz A. Flórez, 2017. "Informalidad laboral y elementos para un salario mínimo diferencial por regiones en Colombia," Borradores de Economia 1023, Banco de la Republica de Colombia.

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    More about this item

    Keywords

    VAT; Payroll tax; Corporate income tax; Employment; Informality; Wages; Latin America;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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