IDEAS home Printed from https://ideas.repec.org/p/idb/brikps/6379.html
   My bibliography  Save this paper

Taxation and Economic Growth in Colombia

Author

Listed:
  • Steiner, Roberto

Abstract

This Working Paper assesses the impact on investment of a reduction in corporate taxes and the impact on employment, labor formality, and growth of a reduction in non-wage labor costs in Colombia. First, and following Hall and Jorgensen (1967), we estimate an investment function, which depends on the user cost of capital, one of whose determinants is the corporate tax rate. Our estimations suggest that a reduction of the corporate tax rate from 33 to 23 percent--as originally envisioned by the government in early 2012, but finally not included in the reform submitted to Congress--has very different short and long-term effects on investment in machinery and equipment. While the user cost of capital declines 0.9 percent, investment (excluding the oil and mining sector) increases on impact only 28 bps in relation to GDP, an increase that does not compensate the fiscal cost incurred. In the long term, however, it is likely that the significant boost in investment (of around 5 percent of GDP) makes such a policy intervention fiscally sustainable. Second, using a computable general equilibrium model calibrated for Colombia, we estimate that the reduction of the "pure tax" component of non-wage labor costs approved in late 2012 is associated with a 0.5 percent increase in overall employment and, more importantly, with a 1.4 percent increase in formal sector employment. Our estimations indicate that this is achieved at no fiscal cost since government revenue increases as a result of higher output and employment.

Suggested Citation

  • Steiner, Roberto, 2014. "Taxation and Economic Growth in Colombia," IDB Publications (Working Papers) 6379, Inter-American Development Bank.
  • Handle: RePEc:idb:brikps:6379
    as

    Download full text from publisher

    File URL: https://publications.iadb.org/publications/english/document/Taxation-and-Economic-Growth-in-Colombia.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Osmel Manzano & Francisco Monaldi, 2008. "The Political Economy of Oil Production in Latin America," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2008), pages 59-103, August.
    2. Carlos Pombo, 1999. "Productividad industrial en Colombia: Una aplicación de números índices," Revista de Economía del Rosario, Universidad del Rosario, June.
    3. Adriana Kugler & Maurice Kugler, 2009. "Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia," Economic Development and Cultural Change, University of Chicago Press, vol. 57(2), pages 335-358, January.
    4. Jaime Saavedra & Mhmo Torero, 2004. "Labor Market Reforms and Their Impact over Formal Labor Demand and Job Market Turnover. The Case of Peru," NBER Chapters, in: Law and Employment: Lessons from Latin America and the Caribbean, pages 131-182, National Bureau of Economic Research, Inc.
    5. John Hutton & Anna Ruocco, 1999. "Tax Reform and Employment in Europe," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(3), pages 263-287, August.
    6. Roberto Steiner & Alex Cañas, 2013. "Tributación y Equidad en Colombia," Documentos CEDE 11453, Universidad de los Andes, Facultad de Economía, CEDE.
    7. Jesús Alonso Botero & Andrés Ramírez Hassan & Juan Fernando Palacio, 2007. "El costo de uso del capital y la inversión en Colombia 1990 - 2007," Revista Ecos de Economía, Universidad EAFIT, October.
    8. Roberto Steiner & Carolina Soto, 1998. "Costo del uso del capital y tasas marginales efectivas de tributación en Colombia," Working Papers Series. Documentos de Trabajo 9204, Fedesarrollo.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marcela Eslava & John Haltiwanger & Adriana Kugler & Maurice Kugler, 2010. "Factor Adjustments after Deregulation: Panel Evidence from Colombian Plants," The Review of Economics and Statistics, MIT Press, vol. 92(2), pages 378-391, May.
    2. Eslava, Marcela & Haltiwanger, John C. & Kugler, Adriana & Kugler, Maurice, 2009. "Trade Reforms and Market Selection: Evidence from Manufacturing Plants in Colombia," IZA Discussion Papers 4256, Institute of Labor Economics (IZA).
    3. Leonardo RHENALS ROJAS, 2005. "Costo de Uso del capital en Colombia: 1997-2003," Archivos de Economía 2208, Departamento Nacional de Planeación.
    4. Gustavo Hernández, 2012. "Payroll Taxes and the Labor Market: A Computable General Equilibrium Analysis," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 49(1), pages 99-123, May.
    5. Juan Perilla & Gabriel Piraquive, 2012. "La composición sectorial de la inversión y su implicaciones en la medición de los servicios del capital y el crecimiento en Colombia," Revista de Economía del Rosario, Universidad del Rosario, June.
    6. Fabio Sánchez & Valentina Duque & Mauricio Ruíz, 2009. "Costos laborales y no laborales y su impacto sobre el desempleo, la duración del desempleo y la informalidad en Colombia, 1980-2007," Documentos CEDE 5540, Universidad de los Andes, Facultad de Economía, CEDE.
    7. Adriana D. Kugler, 2019. "Impacts of Labor Market Institutions and Demographic Factors on Labor Markets in Latin America," IMF Working Papers 2019/155, International Monetary Fund.
    8. Gustavo Adolfo HERNANDEZ DIAZ, 2011. "Impuestos parafiscales y mercado laboral: Un análisis de Equilibrio General Computable," Archivos de Economía 8954, Departamento Nacional de Planeación.
    9. Kaplan, David S., 2009. "Job creation and labor reform in Latin America," Journal of Comparative Economics, Elsevier, vol. 37(1), pages 91-105, March.
    10. Amit Gandhi & Salvador Navarro & David Rivers, 2011. "On the Identification of Production Functions: How Heterogeneous is Productivity?," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 20119, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    11. Kim, Jinyoung & Kim, Seonghoon & Koh, Kanghyock, 2022. "Labor market institutions and the incidence of payroll taxation," Journal of Public Economics, Elsevier, vol. 209(C).
    12. Xavier Jara & David Rodríguez, 2019. "Financial disincentives to formal work: Evidence from Ecuador and Colombia," WIDER Working Paper Series wp-2019-14, World Institute for Development Economic Research (UNU-WIDER).
    13. Müllner, Jakob & Puck, Jonas, 2018. "Towards a holistic framework of MNE–state bargaining: A formal model and case-based analysis," Journal of World Business, Elsevier, vol. 53(1), pages 15-26.
    14. Arango-Thomas, Luis Eduardo & Montenegro, Paola & Obando, Nataly, 2012. "El desempleo en Pereira : ¿Solo cuestión de remesas?," Chapters, in: Arango-Thomas, Luis Eduardo & Hamann-Salcedo, Franz Alonso (ed.), El mercado de trabajo en Colombia : hechos, tendencias e instituciones, chapter 17, pages 711-749, Banco de la Republica de Colombia.
    15. Echavarría-Soto, Juan José & López, Enrique & Ocampo, Sergio & Rodríguez-Niño, Norberto, 2012. "Choques, instituciones laborales y desempleo en Colombia," Chapters, in: Arango-Thomas, Luis Eduardo & Hamann-Salcedo, Franz Alonso (ed.), El mercado de trabajo en Colombia : hechos, tendencias e instituciones, chapter 18, pages 753-794, Banco de la Republica de Colombia.
    16. Jaakkola, Niko & Spiro, Daniel & van Benthem, Arthur A., 2019. "Finders, keepers?," Journal of Public Economics, Elsevier, vol. 169(C), pages 17-33.
    17. Matthieu Bunel & Fabrice Gilles & Yannick L'Horty, 2009. "The effect of social security payroll tax reductions on employment and wages: an evaluation of the 2003 French reform," Working Papers hal-01292089, HAL.
    18. Thomas Leoni & Margit Schratzenstaller, 2020. "Senkung der Lohnnebenkosten und Finanzierungsvarianten. Bisherige Erkenntnisse und internationale Reformbeispiele," WIFO Studies, WIFO, number 66851, June.
    19. Adriana D. Kugler & Maurice D. Kugler & Luis O. Herrera-Prada, 2017. "Do Payroll Tax Breaks Stimulate Formality? Evidence from Colombia’s Reform," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2017), pages 3-40, November.
    20. Renata Narita, 2020. "Self-Employment in Developing Countries: A Search-Equilibrium Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 1-34, January.

    More about this item

    Keywords

    Computable general equilibrium models; Investment; User cost of capital; Corporate taxation; Non-wage labor costs;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies

    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:idb:brikps:6379. See general information about how to correct material in RePEc.

    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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Felipe Herrera Library (email available below). General contact details of provider: https://edirc.repec.org/data/iadbbus.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.