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The Elasticity of Informality to Taxes and Transfers

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  • Alonso-Ortiz, Jorge
  • Leal Ordonez, Julio

Abstract

In this work we study the impact on the size of the informal sector of a tax levied on formal workers, and transfers that may be distributed to both formal and informal workers alike. We build a search model that features an informal sector and we calibrate it to data from Mex- ico. We investigate whether changes in size and distribution of transfers between formal and informal workers have a significant impact on the size of the informal sector. We find that changes in the distribution, for a given size, create a range of variation of 19.35pp. Analogously, changes in size create a range of variation of 5.7pp, resulting in a total range of variation of 51.2pp. This implies that it is possible to substantially increase formalization by rising extra tax resources as long as they accrue to formal workers. We illustrate the validity of our approach simulating the introduction of Seguro Popular.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49568.

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Date of creation: 22 Aug 2013
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Handle: RePEc:pra:mprapa:49568

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Keywords: Informal Sector; Search; Tax and Transfer Programs; Seguro Popular;

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  1. Guillermo E. Perry & William F. Maloney & Omar S. Arias & Pablo Fajnzylber & Andrew D. Mason & Jaime Saavedra-Chanduvi, 2007. "Informality : Exit and Exclusion," World Bank Publications, The World Bank, number 6730, October.
  2. Alberto Chong & Mark Gradstein, 2004. "Inequality, Institutions, and Informality," Research Department Publications 4377, Inter-American Development Bank, Research Department.
  3. �ureo de Paula & Jose A. Scheinkman, 2010. "Value-Added Taxes, Chain Effects, and Informality," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 195-221, October.
  4. Hernan Moscoso Boedo & Pablo D'Erasmo, 2010. "Financial Structure, Informality and Development," 2010 Meeting Papers 319, Society for Economic Dynamics.
  5. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  6. Costas Meghir & Renata Narita & Jean-Marc Robin, 2012. "Wages and Informality in Developing Countries," Cowles Foundation Discussion Papers 1874, Cowles Foundation for Research in Economics, Yale University.
  7. Mark Gradstein & Alberto E. Chong, 2004. "Inequality, Institutions, and Informality," IDB Publications 6824, Inter-American Development Bank.
  8. Mariano Bosch & Julen Esteban-Pretel, 2013. "The Labor Market Effects of Introducing Unemployment Benefits in an Economy with High Informality," GRIPS Discussion Papers 12-20, National Graduate Institute for Policy Studies.
  9. M. Keane & R. Moffitt, . "A structural model of multiple welfare program participation and labor supply," Institute for Research on Poverty Discussion Papers 1080-96, University of Wisconsin Institute for Research on Poverty.
  10. Zoë Kuehn, 2010. "Tax rates, governance, and the informal economy in high-income countries," Working Papers 2010-07, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales, revised 22 Oct 2011.
  11. Mariano Bosch & Julen Esteban-Pretel, 2009. "Cyclical Informality and Unemployment," CIRJE F-Series CIRJE-F-613, CIRJE, Faculty of Economics, University of Tokyo.
  12. Dabla-Norris, Era & Gradstein, Mark & Inchauste, Gabriela, 2008. "What causes firms to hide output? The determinants of informality," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 1-27, February.
  13. Antunes, Antonio R. & Cavalcanti, Tiago V. de V., 2007. "Start up costs, limited enforcement, and the hidden economy," European Economic Review, Elsevier, vol. 51(1), pages 203-224, January.
  14. Dessy, Sylvain & Pallage, Stéphane, 2001. "Taxes, Inequality and the Size of the Informal Sector," Cahiers de recherche 0112, Université Laval - Département d'économique.
  15. Rodrigo Barros, 2008. "Wealthier But Not Much Healthier: Effects of a Health Insurance Program for the Poor in Mexico," Discussion Papers 09-002, Stanford Institute for Economic Policy Research.
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