Impact evaluation of the 2012 Tax Reform

What was the impact of the tax reform on employment and wages?

Project details

  • Client

    Research funds from the Interamerican Development Bank (IDB)
  • Services

    Ex post impact evaluation using firm-level data.

  • Team in charge

    Raquel Bernal

    Marcela Eslava

    Marcela Meléndez

    Alvaro José Pinzón

     

  • Year

    2014 to 2017
  • Categories

Downloadable

Project summary

The   Colombian   2012   tax   reform   reduced   payroll   taxes and   employer contributions  to  health  insurance  by  13.5%,  while  also  increasing  corporate income  taxes.  Shifting  taxation  from  formal  employment  to  other  business activities  is  a  policy  recipe  under  heated  discussion  in  Latin  America.  In  this context,  the  reform  offers  an  ideal  laboratory  to  study empirically  the  potential distortions  against  formal  employment  associated  with  payroll  taxes,  in  contrast to other taxes to firms.

Using monthly firm-level data on all formal employment in the country, and a  difference-in-difference  approach that takes advantage  of the fact  that  a  few  sectors  were  exempt  from  the  2012  tax reform,  we  analyzed  the impact of the reform on employment and wages. We found a positive effect of 4.3% on firm employment and of 2.7% on firm average wage. The size of the estimated effects  decreases  with  firm  size:  it  is  micro  and  small  firms  that  see  larger increases  in  employment  and  wages.  In  fact,  we  found no significant  effect  on employment  for  medium-large  firms.  

Our  findings  are supportive  of  additional efforts  to  further  reduce  payroll  taxes,  which  are  still  high  in  the  country,  while also   raising   concerns   about   formal   employment   in   Colombia   being   highly sensitive to the overall taxation faced by the firm, especially in medium and large firms, which represent over 80% of formal employment.

Highlights

  • Product: Academic paper: Bernal. R, M. Eslava and M. Meléndez (2015). Taxing Where You Should: Formal Employment and Corporate Income vs Payroll Taxes in the Colombia. Manuscript.