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The impact of lowering the payroll tax on informality in Colombia

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  • Fernández, Cristina
  • Villar, Leonardo

Abstract

In 2012, the Colombian Government reduced employer payroll contributions from 29.5 to 16.0 percent. Two years later, the informality rate had diminished by about 4.0 percentage points. This paper attempts to estimate how much of this reduction was due to the tax reform, isolating the impact of other macroeconomic variables. A natural approach to performing this task is to apply a difference-in-differences methodology using a household survey panel. Since the Colombian survey does not have a panel structure, we simulated one using a matching difference-in-differences methodology. According to the results, the tax reform is associated with a 4.8-percentage-point decrease in the informality of workers affected by the reform in the thirteen main metropolitan areas. This represents approximately half the reduction of the relevant informality rate during that period, affecting mostly salaried men and workers in general with low levels of education.

Suggested Citation

  • Fernández, Cristina & Villar, Leonardo, 2017. "The impact of lowering the payroll tax on informality in Colombia," LSE Research Online Documents on Economics 123094, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:123094
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    More about this item

    Keywords

    informal markets; payroll taxes; matching; difference-in-differences;
    All these keywords.

    JEL classification:

    • J40 - Labor and Demographic Economics - - Particular Labor Markets - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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