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Financial disincentives to formal employment and tax-benefit systems in Latin America

Jara, H Xavier and Deza Delgado, María Cecilia and Oliva, Nicolás and Torres, Javier (2022) 'Financial disincentives to formal employment and tax-benefit systems in Latin America.' International Tax and Public Finance. ISSN 0927-5940

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Abstract

The aim of this paper is twofold. First, it provides a comprehensive assessment of the financial disincentives to enter formal employment implied by the design of the tax-benefit system in five Latin American countries: Bolivia, Colombia, Ecuador, Peru, and Venezuela. Then, it analyzes the extent to which formalizing informal workers would contribute to increase fiscal capacity in the region. The results show a wide variation in financial disincentives to enter formal employment, with formalization tax rates ranging between 8.5 percent in Venezuela and 42 percent in Colombia. Formalization tax rates are particularly high for self-employed informal workers, and mainly driven by the high costs associated with social insurance contributions. The analysis further shows that potential entries to formal employment would raise tax revenue in all countries, but mainly through the effect of increased social insurance contributions, whereas personal income tax revenue would have a marginal contribution, except in Bolivia and Venezuela. Interestingly, potential formalization of informal workers with the highest probability of being formal would allow capturing a substantial share of the additional tax revenue lost due to informality.

Item Type: Article
Uncontrolled Keywords: Taxes; Informality; Fiscal capacity; Inequality; Microsimulation
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Institute for Social and Economic Research
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 11 Feb 2022 16:23
Last Modified: 16 Feb 2022 00:52
URI: http://repository.essex.ac.uk/id/eprint/32283

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