The Impact of Tax Asymmetries on Labor and Business Informality: The Case of Colombia

This paper illustrates how two well-indented policies to reduce informality, such as the income tax waiver for small firms and the income tax deduction of labor cost, end up generating a large number of small firms hiring workers, most likely unskilled, without a formal contract. This paper also shows the difficulties in reducing informality in the complex regulatory environment of Colombia. Policies oriented to reduce labor informality have a limited impact and are costly from the fiscal point of view; policies oriented to reduce business informality are more effective, but do not necessarily reduce labor informality if they are directed towards low-productivity firms. The methodology used to illustrate these facts was the estimation of Ulyssea (2018) for the case of Colombia, in an environment of asymmetric tax and social security regulations.