IDEAS home Printed from https://ideas.repec.org/p/col/000123/015212.html
   My bibliography  Save this paper

The impact of lowering the payroll tax on informality in Colombia

Author

Listed:
  • Cristina Fernández

    ()

  • Leonardo Villar

    ()

Abstract

The Colombian government recently reformed the tax law by reducing payroll contributions from 29.5% to 16% and substituting them with a profit tax. The law was passed in December 2012, and two years later the informality rate in the 13 main metropolitan areas diminished from 56% to 51% in December 2014 (using the legal definition of informality). In the whole survey the reduction was a little less pronounced, going from 68% to 64%. This period was also characterized by high, yet also diminishing growth rates; changes in the tax rates, and increasing real minimum wages. It is of the most interest to know how much of this reduction was due to the tax reform. This paper performs this task using a Matching and Difference in Differences methodology. According to the results, the tax reform reduced the informality rate, of the workers affected by the reform in the 13 main metropolitan areas, between 4,3 and 6,8 p.p. which translated in a reduction of the informality rate between 2,0 and 3,1 p.p. given that the treated population was only 45% of the working population of the country in 2012. The impact over the whole survey was between 4,1 and 6,7 which translates into 1,2 to 2,2 p.p. impact on the informality rate of the whole country. Similar results were found using the firm definition of informality. The reform affected mostly salaried workers and employers, males between 25 and 50 years old and workers with low levels of education.

Suggested Citation

  • Cristina Fernández & Leonardo Villar, 2016. "The impact of lowering the payroll tax on informality in Colombia," Working Papers Series. Documentos de Trabajo 015212, Fedesarrollo.
  • Handle: RePEc:col:000123:015212
    as

    Download full text from publisher

    File URL: http://www.repository.fedesarrollo.org.co/handle/11445/3300
    Download Restriction: no

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Cristina Fernández & Leonardo Villar & Nicolás Gómez, 2017. "Taxonomía de la informalidad en América Latina," Coyuntura Económica, Fedesarrollo, vol. 47(1 y 2), pages 137-167, December.
    3. Morales, Leonardo Fabio & Medina, Daniel, 2019. "Fluidez del mercado laboral y resultados en materia de empleo en Colombia: evidencia derivada de datos enlazados de empleadores y empleados," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    4. Albertini, Julien & Terriau, Anthony, 2019. "Informality over the life-cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 182-202.
    5. repec:ecr:col070:44717 is not listed on IDEAS
    6. 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.
    7. Gaurav Khanna & Carlos Medina & Anant Nyshadham & Jorge Tamayo, 2018. "Formal Employment and Organized Crime: Regression Discontinuity Evidence from Colombia," Borradores de Economia 1054, Banco de la Republica de Colombia.
    8. Luis E. Arango & Luz A. Flórez & María A. Olarte-Delgado, 2019. "Precio del carbón y dinámica laboral en Valledupar," Revista de Economía del Rosario, Universidad del Rosario, vol. 22(2), pages 313-370, December.
    9. Luis E. Arango & Luz A. Flórez & María A. Olarte-Delgado, 2019. "Precio del carbón y dinámica laboral en Valledupar," Revista de Economía del Rosario, Universidad del Rosario, vol. 22(2), pages 313-370, December.
    10. Jukka Pirttilä & Andy McKay & 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).
    11. McKay Andy & Pirttilä Jukka & Schimanski Caroline, 2018. "The Elasticity of Formal Work in African Countries," Working Papers 1820, Tampere University, School of Management and Business, Economics.
    12. Jessen, Jonas & Kluve, Jochen, 2019. "The effectiveness of interventions to reduce informality in low- and middle income countries," Ruhr Economic Papers 814, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    13. Leonardo Fabio Morales & José Lobo, 2017. "Estimating Vacancies from Firms’ Hiring behavior: The Case of a Developing Economy," Borradores de Economia 1017, Banco de la Republica de Colombia.
    14. Andrés Ham & Darío Maldonado & Carlos Santiago Guzmán-Gutiérrez, 2019. "Tendencias recientes en la situación laboral de los jóvenes en Colombia: diagnóstico, desafíos y retos de política pública," Documentos de trabajo 017569, Escuela de Gobierno - Universidad de los Andes.
    15. Leonardo Fabio Morales & Didier Hermida & Eleonora Dávalos, 2019. "Interactions between Formal and Informal Labor Dynamics: Revealing Job Flows from Household Surveys," Borradores de Economia 1090, Banco de la Republica de Colombia.

    More about this item

    JEL classification:

    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:col:000123:015212. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lucía Fenney Pérez). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.