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Work and tax evasion incentive effects of social insurance programs. Evidence from an employment-based benefit extension

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  • Marcelo Bergolo

    (IECON-UDELAR and CEDLAS-UNLP)

  • Guillermo Cruces

    (CEDLAS-UNLP, CONICET and IZA)

Abstract

This article studies how social insurance programs shape individual’s incentives to take up registered employment and to report earnings to the tax authorities. The analysis is based on a social insurance reform in Uruguay that extended healthcare coverage to the dependent children of registered private-sector workers. The identification strategy relies on a comparison between individuals with and without dependent children before and after the reform. The reform increased benefit-eligible registered employment by 1.6 percentage points (about 5 percent above the prereform level), mainly due to an increase in labor force participation rather than to movement from unregistered to registered employment. The shift was greater for parents with younger children and for cohabiting adults whose partners’ jobs did not provide the couples’ children with access to the benefit. Finally, the reform increased the incidence of underreporting of salaried earnings by about 4 percentage points (25 percent higher than the pre-reform level), mostly for workers employed at small firms. The increase in fiscal revenue from higher levels of registered employment was several orders of magnitude greater than the loss of revenue due to an increase in underreporting.

Suggested Citation

  • Marcelo Bergolo & Guillermo Cruces, 2014. "Work and tax evasion incentive effects of social insurance programs. Evidence from an employment-based benefit extension," CEDLAS, Working Papers 0161, CEDLAS, Universidad Nacional de La Plata.
  • Handle: RePEc:dls:wpaper:0161
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    2. Gilbert Mbara & Ryszard Kokoszczynski & Joanna Tyrowicz, 2017. "Striking a balance: optimal tax policy with labor market duality," GRAPE Working Papers 16, GRAPE Group for Research in Applied Economics.
    3. -, 2016. "Horizons 2030: Equality at the centre of sustainable development," Documentos de posición del período de sesiones de la Comisión 40160, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    4. Verónica Amarante & Rodrigo Arim & Mijail Yapor, 2016. "Decomposing inequality changes in Uruguay: the role of formalization in the labor market," IZA Journal of Labor & Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-20, December.
    5. Santiago Levy & Norbert Schady, 2013. "Latin America's Social Policy Challenge: Education, Social Insurance, Redistribution," Journal of Economic Perspectives, American Economic Association, vol. 27(2), pages 193-218, Spring.
    6. Bergolo, Marcelo & Galván, Estefanía, 2018. "Intra-household Behavioral Responses to Cash Transfer Programs. Evidence from a Regression Discontinuity Design," World Development, Elsevier, vol. 103(C), pages 100-118.
    7. Todd Kumler & Eric Verhoogen & Judith A. Frías, 2013. "Enlisting Employees in Improving Payroll-Tax Compliance: Evidence from Mexico," NBER Working Papers 19385, National Bureau of Economic Research, Inc.
    8. Marisa Bucheli & Cecilia Olivieri, 2017. "Gendered Effects of the Personal Income Tax: Evidence from a Schedular System with Individual Filing in a Developing Country," Documentos de Trabajo (working papers) 0217, Department of Economics - dECON.
    9. Amarante, Verónica & Arim, Rodrigo & Yapor, Mijail, 2015. "Desigualdad e informalidad en el Uruguay," Libros de la CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 39655.
    10. François Gerard & Gustavo Gonzaga, 2016. "Informal Labor and the Efficiency Cost of Social Programs: Evidence from the Brazilian Unemployment Insurance Program," NBER Working Papers 22608, National Bureau of Economic Research, Inc.
    11. Bergolo, Marcelo & Cruces, Guillermo, 2016. "The Anatomy of Behavioral Responses to Social Assistance When Informal Employment Is High," IZA Discussion Papers 10197, Institute for the Study of Labor (IZA).
    12. -, 2016. "Hacia un desarrollo inclusivo: el caso del Uruguay," Coediciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 40494 edited by Cepal.
    13. -, 2016. "Horizons 2030: Equality at the centre of sustainable development," Libros y Documentos Institucionales, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 40160 edited by Eclac.
    14. Guillermo Cruces & Guido Porto & Mariana Viollaz, 2018. "Trade Liberalization and Informality in Argentina: Exploring the Adjustment Mechanisms," CEDLAS, Working Papers 0229, CEDLAS, Universidad Nacional de La Plata.
    15. repec:spr:izalpo:v:6:y:2017:i:1:d:10.1186_s40173-017-0085-1 is not listed on IDEAS
    16. Robert Osei & Jukka Pirttilä & Pia Rattenhuber, 2017. "Quantifying the impacts of expanding social protection on efficiency and equity: Evidence from a behavioural microsimulation model for Ghana," WIDER Working Paper Series 193, World Institute for Development Economic Research (UNU-WIDER).

    More about this item

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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