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

H. Xavier Jara; María Cecilia Deza Delgado; Nicolás Oliva; Javier Torres

doi:10.1007/s10797-021-09724-8

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

H. Xavier Jara, María Cecilia Deza Delgado, Nicolás Oliva, Javier Torres

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Resumen

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.

Idioma original	Inglés
Páginas (desde-hasta)	69-113
Número de páginas	45
Publicación	International Tax and Public Finance
Volumen	30
N.º	1
Fecha en línea anticipada	2 feb. 2022
DOI	https://doi.org/10.1007/s10797-021-09724-8
Estado	Publicada - feb. 2023

Nota bibliográfica

Funding Information:
The results presented herein are based on the following three projects: (i) LATINMOD, a project sponsored by the Centro Estratégico Latinoamericano de Geopolítica (CELAG), funded by The Venezuelan Economic and Social Development Bank (BANDES) and with the collaboration of EUROMOD; (ii) ECUAMOD v1.4. ECUAMOD is developed, maintained, and managed by UNU-WIDER in collaboration with the EUROMOD team at the Institute for Social and Economic Research (ISER) the Southern African Social Policy Research Institute (SASPRI), and local partners in selected developing countries (Ethiopia, Ghana, Mozambique, Tanzania, Zambia, Ecuador and Viet Nam) in the scope of the SOUTHMOD project. The local partner for ECUAMOD is the Instituto de Altos Estudios Nacionales (IAEN); and (iii) COLMOD v1.2, a project developed and managed by the Faculty of Economics at Universidad Externado de Colombia. The authors are indebted to the many people who have contributed to the development of LATINMOD, SOUTHMOD, ECUAMOD, and COLMOD, as well as to David Rodriguez for his helpful assistance and comments. The results and their interpretation presented in this publication are solely the authors’ responsibility.

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© 2022, The Author(s).

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Financial disincentives to formal employment and tax-benefit systems in Latin America
Jara, H. X., Deza Delgado, M. C., Oliva, N. & Torres, J., may. 2020, (Publicación electrónica previa a su impresión) Washington D. C. 35 p. (IDB technical note; n.º 1907)
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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.",

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AU - Oliva, Nicolás

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N1 - Funding Information: The results presented herein are based on the following three projects: (i) LATINMOD, a project sponsored by the Centro Estratégico Latinoamericano de Geopolítica (CELAG), funded by The Venezuelan Economic and Social Development Bank (BANDES) and with the collaboration of EUROMOD; (ii) ECUAMOD v1.4. ECUAMOD is developed, maintained, and managed by UNU-WIDER in collaboration with the EUROMOD team at the Institute for Social and Economic Research (ISER) the Southern African Social Policy Research Institute (SASPRI), and local partners in selected developing countries (Ethiopia, Ghana, Mozambique, Tanzania, Zambia, Ecuador and Viet Nam) in the scope of the SOUTHMOD project. The local partner for ECUAMOD is the Instituto de Altos Estudios Nacionales (IAEN); and (iii) COLMOD v1.2, a project developed and managed by the Faculty of Economics at Universidad Externado de Colombia. The authors are indebted to the many people who have contributed to the development of LATINMOD, SOUTHMOD, ECUAMOD, and COLMOD, as well as to David Rodriguez for his helpful assistance and comments. The results and their interpretation presented in this publication are solely the authors’ responsibility. Publisher Copyright: © 2022, The Author(s).

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N2 - 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.

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

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

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