ClientResearch funds from the Interamerican Development Bank (IDB)
Ex post impact evaluation using firm-level data.
Team in charge
Alvaro José Pinzón
Year2014 to 2017
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.
- 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.