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The elasticity of Informality to Taxes and tranfers

Author

Listed:
  • Jorge Alonso-Ortiz

    (Centro de Investigación Económica (CIE), Instituto Tecnológico Autónomo de México (ITAM))

  • Julio Leal

    (Banco de México)

Abstract

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 Mexico. We investigate whether changes in size and distribution of transfers between formal and informal workers have a signi cant impact on the size of the informal sector. We nd 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.

Suggested Citation

  • Jorge Alonso-Ortiz & Julio Leal, 2013. "The elasticity of Informality to Taxes and tranfers," Working Papers 1308, Centro de Investigacion Economica, ITAM.
    • Handle: RePEc:cie:wpaper:1308
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    References listed on IDEAS

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    Cited by:

    1. Arturo Antón, 2014. "The effect of payroll taxes on employment and wages under high labor informality," IZA Journal of Labor & Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 3(1), pages 1-23, December.
    2. McKay Andy & Pirttilä Jukka & Schimanski Caroline, 2018. "The Elasticity of Formal Work in African Countries," Working Papers 1820, Tampere University, Faculty of Management and Business, Economics.
    3. Antón, Arturo & Leal, Julio, 2013. "Aggregate Effects of a Universal Social Insurance Fiscal Reform," IDB Publications (Working Papers) 4580, Inter-American Development Bank.
    4. Andy McKay & Jukka Pirttilä & 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).

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    More about this item

    Keywords

    Informal Sector; Search; Tax and Transfer Programs; Seguro Popular;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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