Fiscal policy and informality in Colombia

Andres Felipe Garcia Suaza, Monica Alexandra Gomez Ospina, Fernando Jaramillo Mejía

Research output: Working paper

Abstract

This paper studies how informality reacts to fiscal policy instruments. We develop an analytical framework with a dual labor market with frictions, where the formal sector, in contrast to the informal sector, produces with technology using capital and pay taxes. We calibrate the model for the Colombian economy and quantify to what extent a decrease in payroll taxes is effective to create formal jobs in a context where government compensates for the reduction in revenues by using other fiscal instruments, such as reducing expenditure or increasing other taxes, e.g., consumption or capital income taxes.
Original languageEnglish (US)
Pages1-29
Number of pages29
StatePublished - Jun 2021

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