Ítem
Acceso Abierto
Tax policies, informality, and real wage rigidities
Título de la revista
Autores
García Suaza, Andrés Felipe
Jaramillo Mejía, Fernando
Salazar, Marlon
Fecha
2023-04-28
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Editor
Universidad del Rosario
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Resumen
Abstract
Developing countries have a vast informal sector generally associated with low productivity levels. The response of informal employment to tax policies might depend on labor market rigidities. This paper proposes a theoretical framework consisting of a search and matching model with segmentation in the labor market to understand how tax policies and enforcement interact to determine the size of the formal sector. The analytical results show that decreasing payroll taxes increases formal employment demand, and enforcement expenditure decreases informal employment offers. The model suggests that a tax policy combination leads to a significant impact on informality reduction. Moreover, the magnitude of the effect of tax policies depends on real wage rigidities, i.e., when the economy faces high real wage rigidities, the tax policies have a higher effect on informality reduction.
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Keywords
Informality , Payroll taxes , Fiscal policy , Enforcement , Search frictions , Shirking , Developing countries
