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Assessing the effect of payroll taxes on formal employment: the case of the 2012 tax reform in Colombia

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  • Morales, Leonardo Fabio
  • Medina, Carlos

Abstract

In 2013, Colombia implemented a tax reform that reduced payroll taxes by a total of 13.5 percentage points of wages. This paper evaluates the effects of this component of the 2012 Colombian tax reform on firms’ formal employment and average wages. We construct a panel of firms based on their employees’ administrative records. To account for the endogeneity of the treatment, we use an instrumental variables technique that exploits the exogenous variation from the decisions of firms that are similar to each other in several dimensions, but belong to different economic sectors. Based on our preferred specification, we estimate a positive and significant increase in formal employment, as a result of the implementation of the reform, of approximately 213,000 jobs in existing pre-reform firms. In the long run, these effects will increase to more than 600,000 jobs. The effect of the reform on the average wages paid by firms was also found to be positive for some sizes of firms, but the overall effect in the short run is rather small.

Suggested Citation

  • Morales, Leonardo Fabio & Medina, Carlos, 2017. "Assessing the effect of payroll taxes on formal employment: the case of the 2012 tax reform in Colombia," LSE Research Online Documents on Economics 123170, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:123170
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    More about this item

    Keywords

    fiscal policy; payroll taxes; formal employment; formal wages;
    All these keywords.

    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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